This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, it is subject to change and we are not responsible for any errors or omissions.
The rising cost of living can be damaging if not managed carefully. The “pace” of these costs is captured by inflation measures, such as the Consumer Price Index (CPI). Yet, how exactly does inflation affect your financial plan? What are the long-term consequences, and what can you do to guard against inflation? Below, our financial advisers offer some answers for expats as you consider how to approach the cost of living in 2025.
What Is Inflation?
Inflation refers to the overall rise in price for goods and services in an economy over a specific period. In the UK, the CPI measure is determined by collecting price changes for a “basket” of goods and services commonly purchased by UK households.
Measuring inflation is not a precise science. This is reflected in two other inflation measures sometimes used by UK policymakers: the Retail Price Index (RPI) and the Consumer Price Index including owner occupiers’ housing costs (CPIH).
Inflation can be “felt” differently by people in the UK, depending on their spending habits. For instance, someone who spends a lot on petrol may experience a changing price level differently to someone who does not own a car.
For expats, it is also important to recognise that inflation varies across countries. The UK has its own inflation measures mentioned above. However, the EU has a separate inflation measure called the Harmonised Index of Consumer Prices (HICP).
The HICP represents the average price level for dozens of countries. However, living costs can vary greatly between EU member states. The cost of living is different in Germany compared to Poland, for instance.
This is all to say that inflation is difficult to measure and is experienced differently depending on where you live and your expenses. However, it has important implications for your finances – not just in the short-term but also regarding wealth building.
How Inflation Affects Your Financial Plan
Inflation erodes the “spending power” of a single unit of currency. For instance, one euro will buy fewer goods and services in 10 years compared to today.
To preserve your spending power, your income and savings should rise at least in line with inflation. For most expats, that means raising your salary (or pension income) each year, and getting an interest rate on your savings that matches an inflation measure – e.g. the CPI.
Inflation has a “hidden” and “corrosive” effect on your money. For example, your bank statement might show an increase in your savings over, say, one year. However, if the interest rate has not matched or beaten inflation, then the money has lost value in real terms.
Similarly, the real value of your investments may be obscured by inflation. If your portfolio rises by 8% in a single year but inflation rises by 5%, then your “real” returns are 3%. Other “hidden” costs could also mask your performance, such as investment fees and currency conversion (FX or forex) costs).
How to Guard Against Inflation
When it comes to financial planning, it is helpful to recognise what you can and cannot control. For instance, you cannot control the price level, but you can set your monthly budget.
As an expat, you may have a lot of control over where you live in the world (certain countries offer a lower cost of living than others!). Investors also have a say over which assets to include in their portfolios.
It is important to reflect on your personal financial goals, situation and needs since these have a big impact on your options. For instance, if you are nearing retirement, the UK State Pension is an important source of income to consider. The “triple lock” system raises the income by at least 2.5% each year and is available to British expats depending on their country of residence.
For investors, consider speaking with a financial adviser about how to best mitigate inflation. In certain cases, inflation-hedged investments could be an option (e.g. inflation-linked bonds). However, be careful to consider the potential drawbacks before making any financial decisions (e.g. potentially lower yields than regular bonds).
One of the best safeguards against inflation is diversification. Avoid putting all your eggs in one basket. Rather, spread your investments across different asset classes, such as stocks, bonds and real estate. An adviser can recommend an appropriate asset allocation for you depending on your specific goals, needs, time horizon and risk tolerance.
Invitation
We hope these insights have inspired some ideas about how you can address inflation in your own financial plan.
If you’d like to make sure you’re taking the right steps to safeguard your financial future, please get in touch to speak with one of our financial advisers.