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Inflation is causing concern in Spain, the UK and elsewhere
Tuesday, 24 May 2022
 It has been climbing steadily since last summer, hitting almost 10% in Spain this March and 7% in the UK. Even low levels impact your spending power over time, so take steps now to protect your savings and retirement income for your long-term future.

Inflation has been back in the news, but we don't need to read the headlines to know the cost of living is going up, we're only too aware with our weekly shops and electricity bills.


This follows 10 years of benign, easy to ignore inflation, but in fact we were not immune from it then. It is always there, slowly eroding the spending power of the Euro in our pocket and we should always be vigilant about how it impacts our financial security through retirement.


Although this inflation surge is lasting longer than first anticipated, and may get worse before it gets better, it is not expected to be long-term. But hopefully people will view it as an eye opener and take this long-term threat more seriously now. We cannot predict what inflation will be in ten or twenty-years' time, but we do know that even low levels can seriously reduce your spending power over time if your money does not grow at the same rate.


Inflation in Spain and Europe


A year ago, in April 2021, Spain's Consumer Price Index stood at 2%. When it hit 9.8% in March 2022 this was the highest rate for 37 years. While much of this is down to high electricity and fuel prices, food and non-alcoholic beverages rose by 6.8%.


At least the official ‘flash estimate' for April is almost 1.5 points lower at 8.4%, though this still needs to be confirmed. The main reason for the drop was lower fuel and electricity prices. The market price of natural gas declined and the Spanish government also began subsidising the price of gasoline and diesel. Food prices, however, increased again in April.


Across the EU as a whole the Harmonised Index of Consumer Prices was 7.4% in March, with a similar 7.5% estimate for April.


In the UK, the Consumer Price Index hit 7% in March. You have to go back 30 years to find a higher rate (7.1% in March 1992).


Will inflation remain high?


When prices began rising last summer, that was largely caused by the ‘base effect' (inflation the previous year had been unusually low in the pandemic) and supply difficulties as economies exited from lockdowns. However, the crisis in Ukraine then exacerbated the issues, particularly with energy prices escalating.


The short-term outlook remains uncertain, with the ongoing Ukraine war and also concerns that renewed lockdowns in China could disrupt supply chains again.


European Central Bank Vice President, Luis de Guindos, sounded hopeful at the end of April when he commented that the Eurozone close to reaching peak inflation. The Bank expects price pressures to diminish in the second half of this year, although energy costs are expected to keep inflation relatively high.


The Bank of Spain had doubled its 2022 annual inflation forecast at the beginning of April, from 3.7% to 7.5%. But looking ahead, it expects inflation to ease to 2% next year then 1.6% in 2024. On 5 May, Spanish Economy Minister Nadia Calvino told the Cercle d'Economia conference that although inflation remains the main concern and there is still high uncertainty, at the moment there is some evidence that Spanish inflation has passed its peak and will start to slow in the second half of the year.


In the UK, however, the Bank of England has just issued a bleaker forecast. It previously predicted an 8% in April, but now warns that inflation could reach 10% by the end of the year. It explained that the cap on energy tariffs means that UK inflation will peak later than other big advance economies. It expects the CPI to fall to 1.3% in three years' time.


In response to inflation, the Bank of England has raised its interest rate four times since December 2021. Its latest move on 5 May took interest rates to 1%, the highest since 2009 - but still a long way below inflation.


Inflation and your savings and retirement income


No-one is immune from inflation. We all need to plan to protect our savings and future income from the rising cost of living. Making sure your money lasts as long as we do should be an integral part of our financial planning for retirement.


If you're retiring now at age 60, you need to plan for over 30 years of retirement. Unless your savings grow each year, they will buy you considerably less as the years go by.


As a basic illustration, if you have €50,000 in a current account with no growth, and inflation is 3% every year, after 10 years its value will have fallen to around €37,000. After 20 years it's around €27,500 and after 30 just €20,555. That's a 59% reduction in purchasing power.


You therefore need to invest in assets that can be expected to produce enough growth to at least keep up with inflation. As we know from the last decade, bank interest rates cannot be expected to do this - in fact, many savers have been earning negative real rates of return.


While you may become more averse to investment risk in retirement, remember that inflation is also a big risk to your savings. You can reduce investment risk to comfortable levels by obtaining an objective calculation of your attitude to risk, then building a suitable well-diversified portfolio around your risk tolerance, time horizon, circumstances and objectives.


Holding your investment portfolio within an arrangement that is tax efficient in Spain helps protect your capital from unnecessary taxation as well as inflation. Review your financial planning annually to have peace of mind about your future, then get back to enjoying your retirement years in Spain.


HICP/CPI inflation data is at 6 May 2022.


David Bowern, Partner, Blevins Franks

+34 952 809 212

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Blevins Franks Wealth Management Limited (BFWML) is authorised and regulated by the Malta Financial Services Authority, registered number C 92917. Authorised to conduct investment services under the Investment Services Act and authorised to carry out insurance intermediary activities under the Insurance Distribution Act. Where advice is provided outside of Malta via the Insurance Distribution Directive or the Markets in Financial Instruments Directive II, the applicable regulatory system differs in some respects from that of Malta. BFWML also provides taxation advice; its tax advisers are fully qualified tax specialists. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts, retirement schemes and companies. This promotion has been approved and issued by BFWML.

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