How does inflation affect your savings?

In October 2025, UK inflation stood at 3.6%, which is above the Bank of England’s 2% target.

However, this rate represents a significant decline compared to when it peaked at 11.1% in October 2022 – the highest rate of inflation seen since October 1981, according to the Office of National Statistics (ONS). 

Here's everything you need to know about how inflation can affect your savings.

Over the past few years, inflation has been high for several reasons.

Russia’s war in Ukraine and a post-pandemic surge in energy demand caused global financial disruption that drove up prices of essential commodities from fuel to food.

Ukraine is known as the ‘food basket’ of Europe, and the disruption caused by the war led to a spike in grain prices and substantial hikes in fuel prices. 

Although inflation has since fallen overall, it was 3.8% in August and September 2025, according to the Bank of England (BoE), partly due to increases in food prices. 

However, the bank’s Monetary Policy Committee thinks this will be the ‘peak’ and that inflation should fall back to around 3% towards the end of the year, before reducing to 2% in 2026. 

So, what does all this mean and how does it affect your savings?

What is inflation? 

Inflation is a general rise in the price of goods and services in a country’s economy. The rate at which it increases over a given period is called the inflation rate.

When inflation goes up, our purchasing power comes down – the money we have won’t stretch as far as it used to.  

The Bank of England aims for the annual rate of inflation to be benchmarked at around 2%.

The logic here is that a manageable level of inflation will encourage consumers to buy services and goods sooner to keep the economy ticking along.  

How does inflation change over time?  

Although the BoE aims to keep the rate of inflation at 2%, this does change over time and in certain circumstances. For example, inflation is the reason that a Mars Bar costs 15p in 1980 but costs around 80p today. 

On the flip side, when demand for goods and services falls, inflation inevitably follows suit.

During the COVID-19 pandemic, for example, consumer spending changed dramatically, with physical shopping ruled out for lengthy periods and hospitality at a standstill. 

A subsequent combination of supply bottlenecks, soaring energy prices and consumer goods prices, partly due to Brexit, led to a spike in inflation and an economic downturn in the UK.

In more recent years, however, inflation rates have begun to decline again, restoring some of the UK consumers’ buying power.

What are the impacts of rising inflation? 

Rising inflation doesn’t just impact the price of goods and services; it also means workers’ wages essentially lose some of their monetary value.

For example, employment figures from the ONS showed that pay between April and July 2022 grew 5.2%. But when you factor in inflation, it meant wages had, in reality, fallen by 3.9% in real terms.  

This is because if the cost of living rose by 10.1% a year in 2022, and average wages were only rising at a rate of 5.2% a year, working people inevitably faced a shortfall.

To counteract these losses, many workers took on more hours, worked while unwell, and had to consider taking on second jobs.

More people felt forced to rely on food banks and additional government support as they struggled to cover the cost of their bills.

How inflation erodes your savings

It’s not just monthly wages that were worth less. Savings were also being eroded by inflation, which affected how much you were technically able to afford in the future. 

For example, if you had a savings pot of £10,000, and the rate of inflation increased at a rate of 2.5% each year, you could see purchasing power drop to just £7,812 in 10 years.

And in 25 years, that same £10,000 would buy you the equivalent of £5,394 today.  

While inflation is down substantially from where it was in 2022, rising housing costs have impacted wages this year. 

According to data from the ONS, average earnings increased by 4.6% for the period from July to September 2025 and 4.8% including bonuses.  This is down slightly from 5% in the previous three-month period. 

However, when consumer price inflation, including owner-occupier housing costs, is factored in, annual wage growth in real terms was just 0.5%.So, most of the salary increase workers saw was eaten up by mortgage costs.  

How to beat inflation with investments 

High street banks and other savings accounts sometimes don’t offer interest rates that beat inflation.

While the BoE’s bank rate reduction in August may have lowered debt repayment costs, it also means banks are more likely to offer less interest on your savings.

There are, however, things you can do to protect your money in the long term.  

What is the impact of inflation on stocks and shares ISAs? 

According to data from Curvo and Yahoo! Finance, the annualised average return for the FTSE 100 over the past 20 years was 6.4% (assuming dividends are reinvested). 

Over the same period, the average annual growth in consumer price inflation was 2.9% - meaning on average, the stock market beat inflation.  

Although there has been stock market turbulence in 2025, investing in shares and similar markets can be a way to grow your savings over the long term.  

Of course, achieving returns over the long term will require you to put money away that you shouldn’t need to touch for a lengthy period, so don’t invest cash you may need for other purposes. 

Using an ISA to protect your investments

If you intend to reach your long-term financial goals, such as retirement, then putting it into a stocks and shares individual savings account (ISA) can be an effective way of riding out periods of high inflation.  

There are plenty of stocks and shares ISA options available, so you can choose the one that’s right for your goals and how risk-averse you are.

You can save up to £20,000 this tax year in an ISA without paying income tax or capital gains tax. 

However, from April 2027, this will fall to £12,000 in a cash ISA for under-65s, with a £20,000 ISA allowance overall (additional money can be saved into a stocks and shares ISA or innovative finance ISA).

How to regularly invest in stocks

Drip-feeding your money, also known as pound-cost averaging, into the stock market is an effective way to minimise losses in uncertain times. But that doesn’t mean it’s without risk.

When you invest small amounts at regular intervals, you may, at times, invest when the market is high, receiving fewer shares for your money. At other times, you may invest when it’s low and get more shares for your money.  

The benefits of investing in smaller sums

Investing in smaller sums helps to smooth out the ups and downs compared with investing a lump sum all at once, bearing in mind the market could plummet in value suddenly if you were to buy before a crash.  

Of course, the smaller your investment, the smaller your gain if the market soars. But it’s the numerous small wins over the long term that can bring you high returns overall.

‘Investing’ is an investment of time as well as money, so being patient for those rewards is key. 

In uncertain times, expert financial advice can be essential to protecting your long-term financial goals. Let us help you find a qualified financial adviser today.

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The BoE’s recent base rate reduction in August 2025 to 4%, paired with lower inflation, has impacted the interest rates that UK savers can expect to earn on their savings.

With the record-high inflation peaks over the past few years reducing the value of Brits’ salaries, a fall in inflation may increase your buying power and stop its real value from eroding.

Let Unbiased connect you with an expert financial adviser who can help you determine the best ways to save your money to safeguard your wealth against inflation fluctuations and reach your long-term financial goals.