Inflation Debunks ‘Cash is King’ Mantra

Is cash really king? A recent survey by NatWest has found uncovered some interesting facts…

A modest level of price inflation is generally seen as acceptable and even as a sign of a healthy economy. For some years, the Bank of England’s target for annual Consumer Prices Index (CPI) growth has been 2%; not a steady 2%, as short-term fluctuations are inevitable, but an average of about 2% over several years.

Inflation rates matter to savers and investors because a high inflation rate erodes the spending power of money. For those with a lot of cash in the bank, interest rates lower than the inflation rate mean they will see their cash eaten away by an invisible but corrosive force, the wider the rate differential, the worse the impact on cash holdings.

Bank interest rates have been very low for the decade or more since the global financial crisis; the inflation rate indicated by CPI growth has also been subdued. This year, however, has seen inflation indices rise faster as the economy recovers. Few economists are talking about double-digit inflation, but the upward trend may prove persistent.

Cash savings in reverse gear

All of the above makes it seem odd that a survey of 2,000+ participants by NatWest Group found that of the 76% of parents/ guardians of under-18s who are saving or investing for them, four in five are doing so exclusively in cash. Praising those who put money aside for their children, NatWest said, ‘The purchasing power of these ‘safe’ cash balances actually goes backwards over the longer term.’

A healthy bank balance of course has its place, as a reassuring buffer against unexpected expenditure (appropriate insurance policies reduce the risk of this), but it is rarely the best long-term home for larger sums.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

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The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

It is important to take professional advice before making any decision relating to your personal finances. Information within this blog is based on our current understanding of taxation and can be subject to change in future.

It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

If you withdraw from an investment in the early years, you may not get back the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change.

The information contained within the blog is for information purposes only and does not constitute financial advice.

The purpose of the blog is to provide technical and general guidance and should not be interpreted as a personal recommendation or advice.