The government introduced the first official measure of inflation – a metric to describe how the price of goods and services has increased in a set period – in 1914. Policy makers used the “working class cost of living index” to adjust wages for essential workers during the first world war.
Since then, the methods for measuring inflation have evolved and several different metrics exist.
Newspaper headlines typically focus on the Consumer Prices Index (CPI), which tracks the average cost of a set basket of goods and services for the past 12 months. The specific items included change each year, depending on consumer trends.
In the past few years, you’ve likely seen reports about rising inflation and in October 2022, it reached a peak of 11.1%.
Fortunately, the rate fell from those highs but inflation is still fluctuating and remains above the Bank of England’s (BoE) target of 2%.
As such, inflation could still affect the value of your savings and your wider financial plan.
Read on to learn more.
Inflation increased to 3.8% in the 12 months to July 2025
Following the rapid increases in inflation that took place during the Covid-19 pandemic and beyond, the outlook became more positive as price rises slowed somewhat.
According to the Office for National Statistics (ONS), inflation had fallen to 1.7% in the 12 months to September 2024.
However, the rate of inflation has started rising again in 2025. Indeed, the ONS reports that inflation was 3.8% in the 12 months to July 2025.
So, while inflation is not as high as it has been in previous years, it still remains above the BoE target and could continue increasing in the future.
It’s important to consider how this might affect your wealth.
Inflation could diminish the spending power of your savings
Putting wealth into a savings account may feel like a “safe” option. You will generate growth as your savings accrue interest, and you won’t be affected by market movements in the same way you would if you invested.
However, inflation could mean that your savings are not necessarily growing as much as you think and, in some cases, the spending power of your wealth might be falling.
For example, imagine you put £10,000 in a savings account with an interest rate of 5% a year ago.
You would now have £10,500. On paper, this is growth of £500.
Yet, if inflation is 3.8%, the same goods and services that cost £10,000 a year ago now cost £10,380. This means that the real-terms growth, when you take inflation into account, is only £120.
Additionally, if inflation was much higher – 10% for example – the same goods and services would cost £11,000. This means that, if your savings are growing at a rate of 5%, you can’t buy as much as you could the previous year.
Consequently, inflation could erode the true value of your wealth, especially if the rate exceeds the interest you generate on your savings.
Fluctuating interest rates may affect you in the future as inflation remains unstable
As well as considering how inflation might affect the value of your savings, you may need to pay close attention to the relationship between inflation and interest rates.
In order to combat inflation, the BoE increased its base rate – the interest rate it charges to other financial institutions – several times, eventually reaching a peak of 5.25% in August 2023.
The BoE employs this strategy to make borrowing more expensive and saving more attractive. As a result, consumers are encouraged to spend less and save more, meaning that price rises slow down.
This might have meant that you saw more growth on your cash savings in recent years as interest rates increased. However, as inflation started falling again, the BoE started reducing the base rate.
Most recently, the base rate fell to 4% in August 2025 – a move that surprised many, given the recent increases in inflation. However, as reported by the BBC, the BoE predicts that the deflated jobs market will reduce upward pressure on inflation.
Additionally, there are concerns that consumers are still fearful of spending, even though wages have grown faster than inflation. It could be the case that the BoE believes, even though inflation remains relatively high, cutting interest rates will encourage more economic growth.
Falling interest rates could affect you because they likely mean that it’s more difficult to achieve significant growth on your cash savings. As a result, the diminishing effects of inflation on your wealth might be more pronounced.
Investing your wealth could help you combat the effects of inflation
Inflation could affect the spending power of your savings, and as interest rates fall, it might be more challenging to generate real-terms growth.
Fortunately, if you invest a portion of your wealth instead, you might be more likely to see inflation-beating returns.
Indeed, according to MoneyAge, recent research compared the average returns from a Cash ISA compared with investments in the FTSE 100 since 1999.
The results showed that if you had paid into a Cash ISA, you would have seen an average annual interest rate of 2.85%.
In comparison, investors who put their wealth into the FTSE 100 would have seen an average annual return of 4.4%.
While past performance doesn’t guarantee future growth, these figures suggest that investing could provide greater returns than holding your wealth in cash.
So, while it could be beneficial to keep a certain amount of cash in an emergency fund, you may want to consider investing a larger portion of your wealth. This could make it more likely that you beat inflation and see real-terms growth.
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Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.