Inflation risk on savings

tigerspill

Hi,
With savings/deposit interest rates being less than inflation - I am just wondering what people use as the %age drag for this in their planning.
I was thinking of using -1% per year. 
Does this sound about right as an assumption?
Thanks

EdGasketTheSecond

I don't think you can plan in the current environment. I am expecting a period of deflation followed by high/hyperinflation. We could also see a mix such as deflating goods prices while essentials like food are inflating; well food is already on the rise.

bowlhead99

We already have a bit of a mix, as for example my petrol is cheaper this year than last , while my lazy microwaveable pouches of rice are less frequently on special offer now that tesco/ morrison already have as many people in the shop as they can handle at once and do not want to encourage 'stocking up' with multibuy deals etc.

To assume a negative real return of something like 1% on cash is fine. You could change it to 0% if you're optimistic or worse than -2 if you're pessimistic. However if a percent or so each year makes a major difference to your plan, the plan is not good enough, and we're unlikely to get majorly negative interest rates if everyone has so much money that all the consumer prices are going through the roof.  Some depends on exchange rates and imported inflation of course.

tigerspill

bowlhead99 said:

We already have a bit of a mix, as for example my petrol is cheaper this year than last , while my lazy microwaveable pouches of rice are less frequently on special offer now that tesco/ morrison already have as many people in the shop as they can handle at once and do not want to encourage 'stocking up' with multibuy deals etc.

To assume a negative real return of something like 1% on cash is fine. You could change it to 0% if you're optimistic or worse than -2 if you're pessimistic. However if a percent or so each year makes a major difference to your plan, the plan is not good enough, and we're unlikely to get majorly negative interest rates if everyone has so much money that all the consumer prices are going through the roof.  Some depends on exchange rates and imported inflation of course.

Thanks for this.  Thinking about it a bit more - I think your second paragraph suggesting that 1% should not really make a huge difference is right.
Lets say I have £200,000 cash needed for 5 years.  So running this down to zero in that five years means I have an average over time of £100,000.  1% time five years is £5,000 (ignoring compounding).  Not a life changer.

Albermarle

1% time five years is £5,000 (ignoring compounding).  Not a life changer.

Also you get something for losing this 1%pa - cash security . In certain circumstances this is more important than 1 %.

tigerspill

Albermarle said:

1% time five years is £5,000 (ignoring compounding).  Not a life changer.

Also you get something for losing this 1%pa - cash security . In certain circumstances this is more important than 1 %.

Definitely.  This is exactly why I have over 5 (probably 7) years in cash.  Just ensuring I understand the downside of this a bit better.  I also have investments for the longer term.