Inflation rears its ugly head again. Be Prepared!

The latest UK inflation figure has just been announced - it's 3.7%. This is way in excess of the Bank of England target of 2.5%. I'm only aware of one UK deposit account which will give a return in excess of this inflation figure after basic rate tax and it's offered by Coventry Building Society. They will pay you 5% gross (4% after basic rate tax) but you have to tie your money up for 5 years (any money you take out in the meantime will have a penalty of six months' loss of interest applied to it).

So why is inflation so high when we are still in recession? (the technical definition of a recession may well suggest that we aren't still in one but I don't think that any of us is fooled by that)

Well, the weakness of the pound against virtually every currency other than the euro hasn't helped - making imports considerably more expensive recently. For example, my wine club has just increased its prices generally by @ £1-£1.50 per bottle (15-20%) to allow for the drop in the value of sterling. This situation is unlikely to change soon as the Bank of England is likely to keep interest rates low (at a time when they would normally be putting them up to fight inflation) because the economy is so weak. This makes it unatractive for other countries to buy sterling as they'll get a very low rate of interest on sterling deposits, which in turn puts pressure on the pound.

I have never seen, in 17 years of experience, so many 'Catch 22' situations all at the same time! Sadly, as more people are beginning to understand, the only way in which many countries will be able to afford their debt is for it to be 'inflated away', suggesting that inflation will continue to rise in the medium term. This is, as we've seen above, really bad news for savers. The answer is to divide your funds up into chunks - money that you may need immediately or in the very short term (and therefore can't afford to take any risk with), more medium term money (low risk)and then the long term stuff. You can afford more risk with the long term stuff (and therefore protect it better from inflation) if you know you won't need to touch it and can therefore ride out any short-term market volatility.

Review your investments and do it regularly!