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Inflation: The cash killer of 2017

What will be the greatest threat to your money next year – job security? Your debts? Guess again

Kate Hughes
Money Editor
Wednesday 07 December 2016 16:16 GMT
Supermarket weep: Half the country is worried about being able to afford life’s basics
Supermarket weep: Half the country is worried about being able to afford life’s basics

Worried about cash? There is good reason to be – 2017 is set to be a year of squeezed finances as static wages, welfare cuts and the rising cost of living take their toll on households that already spend more than they earn.

Next year, average incomes are set to grow at less than half the very weak rate that UK workers experienced in the wake of the financial crisis, according to independent think tank, Resolution Foundation. It predicts real weekly earnings, for the decade 2010 to 2020, will rise by only 1.6 per cent compared with almost 13 per cent growth in the Noughties, and a rise of more than 20 per cent in every other decade since the 1920s.

And unlike the last Parliament, when higher earners were hit slightly harder than middle- and lower-income families, cuts to welfare benefits, such as Universal Credit, mean the opposite is likely to be true. In fact, the Foundation says “the entire bottom third of the income distribution is on course to see their incomes actually fall in the years ahead.”

Perfect storm

But wage freezes are only part of the problem. The Bank of England warned, last week, that inflation – the rate of change in the cost of living – is on course to hit 2.7 per cent next year. That’s almost triple its previous forecast, as the sliding value of the pound since the Brexit vote hits the cost of imported goods.

Around half the UK population is now concerned about an increase in the cost of food, electricity and gas, and petrol prices, new data suggests.

Those who are just making ends meet will be under even more financial pressure. According to savings provider Scottish Friendly, millions of Britons are already living beyond their means – and the looming money storm is yet to break.

Its latest Disposable Income Index report has revealed that the average household has around £990 left each month after essentials like housing, energy, water, groceries, transport, childcare and broadband are paid for. But more than one in 10 homes already spend more than they earn on everyday costs, and for more than one in 20, housing bills alone cost more than they bring in.

Predictably, it’s those at the bottom of the pay scale that are overspending the most. Almost a quarter of 18- to 24-year-olds, and a third of students, spend more than they earn on housing and essentials. More than one in five part-time workers are in the same boat, compared with more than one in 10 unemployed people and only one in 20 retirees.

But there’s a dramatic regional difference too, with twice as many Londoners in the red after housing costs alone, compared with their counterparts in places such as Northern Ireland or the East Midlands.

Fighting back

So how can the effects of a financial triple-whammy in 2017 be buffered?

“You are at the mercy of employers and the marketplace when it comes to wage growth,” says Anna Sofat, founder of financial services provider Addidi Wealth. “So look to enhance your skills and competency with training and exams as a way of increasing earning capacity, while continuing to monitor earnings inside and outside of your company to ensure you are paid fairly.”

Hayley North of chartered financial planner Rose & North says: “Review your mortgage if you have one and consider a new fixed-rate – interest rates will not stay low forever and could hurt when they go up.” She adds: “There are some great five-year fixed rates out there at the moment – under 3 per cent – which will help you keep costs low over the next few years when things are uncertain.

“If you are renting, consider trying to negotiate your rent down a little. Even in some areas of London, demand is low and supply strong so there is room for negotiation if you are moving house or renewing your lease.”

It’s worth saving as much as possible for emergencies, “ideally around ideally three to six months’ worth of expenses”, she says. “Make the most of ISA allowances, benefit from pension tax relief while you can, keep investing and don’t try too hard to find opportunities to make money. Set up your portfolio for the long term and keep your nerve. Once the world settles down in a few years, your investments will have survived the drama and you will have a good base to build on.”

“With low cash savings rates, those with sizeable savings are looking for other options,” says Claire Walsh, a chartered financial planner at Aspect8. “Premium Bonds with an average winning of 1.25 per cent actually look very attractive as a way of saving cash. Increasing numbers of people are also being attracted by crowd-funding sites which typically offer interest rates of 3 to 6 per cent but bear in mind that unlike bank savings these aren’t covered by the Financial Services Compensation scheme and so your money is at risk.

“Where people are willing to take a risk with their money they should consider investing their money. There are online platforms where you can do it yourself, but for those looking for further guidance, they should seek financial advice, particularly on larger sums of money. A moderate risk investment portfolio would typically target annual returns of 5 to 7 per cent.”

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