The cost of living crisis and how it impacts investments
The cost of living crisis and inflation over 10% have made it difficult for people to afford necessities such as housing, food, energy and transport. The rising cost of living has also significantly impacted people’s financial well-being, especially in low and middle-income families.
Rising prices of essential goods and services and stagnant wages have also affected the purchasing power of consumers.
The annual inflation rate reached a 41-year high of 11.1% in October 2022 before easing to 10.1% in January 2023. This sharp rise in the cost of living has led to fewer people being able to continue investing and fewer who can continue to save.
How is it affecting investors?
The cost of living crisis can affect investors in many ways –
- Reduces disposable income, which means less money for people to invest
- Reduces the value of investments, especially if the value of the currency falls or loses value
- Makes it difficult to predict investment returns because of uncertainty and market volatility
The crisis has also led investors to rethink their investment plans and scale back if necessary. A study found that the cost of living crisis is the one driving investing decisions amongst all economic parameters, such as interest rates and inflation. Moreover, with confidence in investments rapidly declining in the UK due to uncertainties, investing may become increasingly unattractive to new investors.
How to tackle the impact of inflation on investments?
The cost of living crisis has the potential to affect investments both positively and negatively, but here are some measures investors can take to combat the impact of inflation.
It is essential to review investment portfolios regularly and ensure they are diversified across asset classes, as diversification might help spread risk and minimise losses in any area.
Investors can also explore income-generating investments such as stocks that pay dividends, rental property, inflation linked assets, infrastructure or renewable energy. More often than not, these offer a reliable source of income and can help offset rising living expenses.
However, it is important to note that the above is not financial advice, and the same strategy might not work for every investor. Investors should do what best suits their risk capability because investing puts capital at risk. Investors are encouraged to seek professional financial advice to navigate economic uncertainties and make informed decisions.
The cost of living crisis in the UK has significantly impacted investments. Inflation can erode the value of investments, and fixed-income investments may not keep pace with rising prices.
Short-term uncertainties can force us to evaluate our financial situation. Therefore, it is essential to regularly review investment portfolios and ensure they are diversified across different asset classes to spread risk and minimise losses.
Disclaimer – WealthKernel is not authorised to provide financial advice. This information does not constitute financial advice or a recommendation. If investors are unsure about any element of their financial situation, they should seek independent professional advice for their circumstances or needs. When investing capital is at risk. The value of investments can go up as well as down. Investors may get back less than they put in and lose all of the initial investment.