Turns out Ridley Scott’s Alien isn’t the only creature returning to haunt our darkest moments this year.

Out of the fog of the Brexit swamp slithers the nearly forgotten, but increasingly deadly Inflation Monster. The Office for National Statistics (ONS) today confirmed that inflation has just jumped up to 2.3%, on its way to nearly 3% by the year end. In banks, no one can hear you scream…

And these rates are the softer Consumer Prices index (CPI) adopted recently as the ‘official’ measure of inflation, in place of the Retail Prices Index (RPI) which is normally higher. If you look in the small print of the Chancellor’s recent Budget, you’ll find RPI assumptions of 3.9% by Christmas.

So whether you prefer the gentler and ‘politically-preferred’ CPI or the more dramatic RPI, inflation IS going up – and steeply.

The causes are fairly obvious. Since voting to leave the EU, Britain has seen the pound fall off a cliff to lose nearly 20% of its value. This massive drop has had some positive effects – the big change in exchange rates meant UK exports were suddenly much cheaper, and overseas profits for FTSE100 companies reported back in the UK were much higher. This has pushed up the UK Stock Market index dramatically since the Brexit vote, despite it defying the gravity of longer term uncertainty.

But that is where the good news ends.

The bad news is that because we import as much as we do, and overseas goods are now 19% more expensive, inflation is being driven steadily and dramatically upwards.

Retailers in more competitive sectors have done much to absorb at least some of the rising costs without passing them on to customers to maintain their market share. But this can’t go on indefinitely and the pressure is now inevitably pushing retail inflation higher and higher.

Who cares about higher inflation?

As part of Abundance’s ongoing desire to understand the public’s financial health, they recently commissioned more independent research by ‘OnePoll’ which included an exploration of what people knew about inflation and how it effects their money.

If you would like to check your own understanding, here is the key question we asked about inflation. See if you get it right.

Given that one of the following is correct, if the annual rate of inflation was to rise to 3%, what effect would it have on the value of your money after 10 years?

  1. The value of cash isn’t affected by inflation
  2. It reduces the value of my cash by 3% over 10 years
  3. It reduces the value of my cash by more than 25% over 10 years
  4. I don’t know

If you had to choose 4) don’t worry – you are far from alone. 43% of the 2,000 respondents said they didn’t know. It was by far the most common answer.

If you chose 1) I am afraid you are wrong, but along with 11% of others. If you chose 2) you were getting warmer but sadly are still wrong, along with 21% of other people.

If you chose 3) – “It reduces the value of my cash by more than 25% over 10 years” – give yourself a pat on the back and join the just 25% of people who got it right!

So yes, shock horror, the research revealed that 75% of British adults don’t know how badly inflation will eat into their savings. Despite this example assuming a ‘modest’ 3% inflation, it will eat a quarter of your savings in only ten years.

But there is more good news

As inflation continues to rear its ugly head, it obviously makes sense to consider moving some of your cash savings into investments where yes, there will be risk, but over the longer term, your money is likely to grow faster than inflation is eating it.

Up to now, the UK’s favourite savings product – the ISA – has come in just two versions, at the opposite ends of the risk/reward spectrum. Cash ISAs are on the face of it risk free, but with returns lower than inflation, your money is steadily losing value. At the other extreme, Stocks and Shares ISAs hold out the prospect of higher returns, but at high risk and high volatility along the way.

This two-horse race has left most British savers opting for Cash ISAs, even if it leaves them exposed to inflation. The big jump to the full-on thrills and spills of Stock and Shares ISAs has left this version of the ISA as a minority sport.

This probably accounts for why the UK public – according to Bank of England statistics – currently holds £1.3 trillion (yes trillion) in cash deposits, including £260 billion in Cash ISAs. Virtually all of that vast stack of cash is earning much less than inflation. In fact, £176 billion of it is held in deposits that pay literally zero interest.

So what about that last bit of good news?

It is the introduction last year of a new type of ISA – the Innovative Finance ISA (IF ISA) – that offers a new risk/reward middle-ground between the Cash and Stocks and Shares extremes. Returns ARE subject to risk – and these will vary across the different IF ISA products available and the different investments offered within them – but many are available that offer lower risk than stocks and shares, but still provide returns that will beat inflation.

IF ISAs are a product right for the times. The Abundance ISA is especially so as the choice of risk/reward levels allows you to guard against inflation but still avoid stock market volatility, while the “win win” investments offer a refreshing solution to growing demand for investments that match people’s values and ethics. In 2017, more of us want control over where and what our money is used for and the Abundance ISA offers exactly that.

We will have to wait for the new Alien movie premiere to see if the latest batch of astronauts can beat the Alien this time. But in the meantime, why not get in touch with your inner Sigourney Weaver and take on the Inflation Monster right now?

Risk warning

Part or all of your original capital may be at risk and any return on your loan or investment depends on the success of the project. Investments tend to be long term and may not be readily realisable. Estimated rates of return are variable and estimates are no guarantee of actual return. Consider all risks before investing.

Martin Campbell

Martin Campbell

Martin has worked in UK finance for over 30 years, helping firms committed to doing a radically better job for their customers to deliver for real. He is well-known and respected in the press as a passionate advocate of positive innovation that genuinely helps the consumer. Follow Martin on Twitter @martincampbell