Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
When you think about investing, you often focus on the risks. But here’s the twist - not investing can be risky too.
If you leave your money sitting in cash, inflation can quietly chip away at its value over time. That means your money won’t go as far in the future as it does today.
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What does inflation do?
Simply put, inflation is the rise in the cost of goods and services over time. The result? Your money buys less than it used to.
How do you measure inflation?
Inflation is measured as a percentage - it shows how much the pound in your pocket has lost value and how much prices have risen over a period of time, usually compared with a year earlier.
Here’s a simple example showing how inflation can outpace your savings - even when you earn interest.
In the UK, the headline inflation rate usually refers to the Consumer Prices Index (CPI). This measures the average change in prices of a basket of goods and services that households commonly buy – such as food, clothing, transport, and energy bills. The Office for National Statistics (ONS) updates the basket each year to reflect how people’s spending habits change. The CPI gives a broad picture of how the overall cost of living is rising.
The latest figures show that UK CPI inflation was 3.1% in the 12 months to August 2026(1). This means prices were, on average, 3.1% higher than a year earlier.
So, even though your savings grew, inflation outpaced it - meaning your money lost buying power.
Why does inflation matter?
Inflation matters because it affects more than the price of your weekly shop. It can influence how far your savings go, what you pay to borrow money and how different investments perform.
It’s also closely linked to interest rates. The Bank of England can raise interest rates, or keep them higher, when inflation is too high, with the aim of reducing spending and slowing price rises. Higher rates can mean better returns on some savings accounts, but they can also make mortgages and other borrowing more expensive.
For investors, changes in inflation and interest rates can affect different investments in different ways. That’s one reason it’s worth understanding inflation when you’re deciding what to do with your money.
Is holding cash a better option?
Holding your money as cash might seem a safer option. But if inflation is higher than your interest rate, your money is effectively losing value over time.
Some savings accounts might offer rates above inflation. But over the long term, you’re more likely to beat inflation by investing - although there are no guarantees.
Don’t forget, you can also earn interest on any uninvested cash in a Fidelity account. You can learn more about how we manage your cash here.
How investing can beat inflation
Investing comes with more risk than holding cash - but it also comes with more potential rewards. With a well-structured investment portfolio, you stand a much better chance of outpacing inflation, especially over the long term, although investments can fall as well as rise.
If you’re investing, don’t forget about the importance of diversification (holding a mix of investments). This helps spread your risk, as different assets (equities - shares and funds, bonds, and alternatives), sectors and geographical areas can perform differently in the same economic conditions.
When it comes to inflation, cash isn’t always king
It’s always worth keeping some money in cash (between three to six months’ essential living expenses) for emergencies. But remember, cash isn’t risk free- it still carries inflation risk. If inflation rises, the real value of that cash shrinks over time.
By investing thoughtfully - and balancing risk with diversification - you give your money the potential to grow faster than inflation.
Source:
(1) Bank of England, Interest rates and Bank Rate: our latest decision, as at 17.09.26
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FAQs
Inflation can rise for different reasons. Demand for goods and services might increase faster than businesses can supply them, or companies might face higher costs for things like energy, materials and wages. Prices of goods imported from overseas can also rise, particularly if the pound weakens.
Falling inflation doesn’t usually mean prices are falling. It means they’re rising more slowly. For example, if inflation falls from 5% to 2%, prices are still increasing – just at a slower rate. A widespread fall in prices is known as deflation.
Inflation can reduce the spending power of your savings over time. If the interest you earn on your savings is lower than the rate of inflation, your balance might still grow, but your money may buy less than it did before.
For example, if your savings earn 3% interest but prices rise by 4%, the value of your money hasn’t kept pace with rising prices.
Interest rates are one of the tools the Bank of England uses to help control inflation.
Higher interest rates generally make borrowing more expensive and can encourage people to save rather than spend. This can reduce demand for goods and services, which can help slow the rate at which prices rise. Lower interest rates can have the opposite effect by making borrowing cheaper and encouraging spending.
Inflation measures how quickly the prices of goods and services are changing across the economy.
The cost of living is more personal. It refers to how much you need to spend on things such as food, housing, energy and transport. Because everyone spends their money differently, changes in the cost of living can affect some households more than others.
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one ofFidelity’s advisers or an authorised financial adviser of your choice.
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