Cookie Policy

We use cookies on our website and have placed these on your computer. By continuing to use our website you consent to this. For more information, including how to change your cookie settings and to disable our non-essential Google Analytics cookies, please refer to our Cookie Policy. If you do not wish to be reminded of this on each visit, please use the close button.

The drop in inflation is no reason to stick with cash

June 2018


Tags: Macro Economics

If you are a saver concerned about the value of your money, the chances are you will have noticed the recent dip in inflation.

Inflation fell slightly to 2.4% in April, down from 2.5% in March and heading against the direction that economists expected.

What happens to savings when interest is lower than inflation?

While savers would normally cheer a deduction in the increase of prices because it means an increase in the real value of savings, interest on cash remains way below the current rate of inflation, despite the recent dip, with average rates on a fixed rate cash ISA around 1.2%.

This means that despite the slight fall in inflation, a saver would still need to be earning 2.5% to make keeping money in cash even slightly worthwhile.

In fact, the slight decrease in inflation actually looks more like bad news for savers, because it means there is less pressure on the Bank of England to increase the base rate - something it normally only does in response to rising inflation, meaning the prospect of higher savings rates has been pushed further into the distance.

If you want low risk and certainty of returns, then falling inflation and ongoing low savings rates makes it difficult to know where to put your money.

Could investing fill the returns gap?

However, these are the sort of macro-economic conditions that could make investing more attractive than saving.

That’s because the stock market tends to favour lower interest rates - a lower cost of borrowing for companies makes it easier for them to grow and for share prices to rise.

The stock market also reacts favourably to falls in inflation, because this makes a rise in interest rates - a growth dampener - less likely.

The FTSE 100 has been fairly volatile this year, falling in April to 6,888 - a level not seen since the end of 2016 - before reaching a high of 7,778 in mid-May then dropping back to 7,739 this week (13 June).

Full graph here

Despite the turbulence, an investor putting money into the stock market last June will have made around 2% in 12 months - roughly keeping up with inflation.

However, someone who invested in April, when the stock market neared an 18-month low, would have returned 11% in six weeks on their money.

Regular investors usually benefit from the ups and downs, thanks to the benefit of buying during low periods - known as pound-cost averaging, and so need to worry less about market-timing than those investing a lump sum at a single point.

Find out more about Regular Investing with Selftrade here

Are there low risk investments that deliver a decent return?

Investing in stocks and shares has the potential to earn a return that is higher than the rate of inflation, unlike cash.

If you like the safety of cash, there are lower risk investment options with more dependable returns, which may sacrifice some of the capital growth of racier stocks and funds, but will behave more like cash savings.

These are called income funds, yield funds or dividend stocks and shares - and they produce a reasonably dependable payment to investors at regular intervals - a bit like interest on savings accounts.

These returns are made up of either equity income - ie. income from dividend payments, or debt payments from bonds, or loans to companies or governments - bond funds, or both.

These may be a good way for you to experience investing in a way that feels more familiar, keeps risks down and stands a better chance of beating inflation than cash.

You can read the Selftrade guide on investing for income here

Some funds that are designed to deliver an income include:

Rathbones Ethical Bond fund

Trade now

Threadneedle UK Social Bond fund

Trade now 

Royal London Ethical Bond fund

Trade now

The many options for lower risk, reliable return income funds and the current inflation/ interest rate dynamic mean cash is very far from its Kingly reputation - and looks unlikely to retain its crown for now.

You can start investing today through any of our account options:

Dealing Account

Access a wide range of global investments in this flexible, unrestricted account.

Find out more

Stocks and Shares ISA

Take advantage of tax free investing with our Stocks and Shares ISA today.

Find out more

Self-Invested Personal Pension (SIPP)

From great value to best-in-class, access the SIPP to suit your needs through our extensive network of providers.

Find out more

I've still got questions!

We’re on hand to help at our Customer Experience Centre on 0345 0700 720

Selftrade does not provide investment advice. This article is the authors view and is not the view or opinion of Selftrade and Selftrade accepts no liability for any loss caused as a result of the use of this information. The opinions expressed are those of the author at the time of writing and should not be interpreted as investment advice.

The value of investments can fall as well as rise and any income from them is not guaranteed and you may get back less than you invested. Past performance is not a guide to future performance. We do not provide advice or make recommendations about investments. If you have any doubts about the suitability of an investment, you should seek advice from a suitably qualified professional adviser.

If you have a Stocks and Shares ISA, make sure you get the best value for your investments. We are ranked top for price on large portfolios (Platforum, 2018).

Open an account today and we’ll cover any transfer fees up to £100.*

*T&Cs apply.

Open a Stocks & Shares ISA

Find out more