How to Tackle Rising Inflation Across Europe

Wherever you are in Europe, inflation is a hot topic of conversation in 2022. From French lawmakers putting together an $8.4 billion plan to push back against rising costs to Bavaria's increasing interest rates, moves are afoot to tackle rising inflation across Europe. However, waiting for government ministers to ease the strain of inflation can feel like an endless task.

Beating inflation isn’t an easy task. It’s an economic dynamic, so you can’t stop it. You could ask for a pay rise or find other ways to increase your earnings. That would increase your income and help offset the rising cost of consumables. However, in tough economic times, companies are often reluctant to pay employees more.

Hedging Against Inflation

An alternative way to combat rising inflation is to hedge against it. For the non-financially minded, a hedge means making investments with the aim of reducing adverse price movements. Saving money during times of high inflation and low-interest rates means the spending power of those funds is gradually waning.

This is why some people use these periods to invest in the financial markets. Instead of keeping spare money in a savings account where it’s losing value due to inflation, people hedge against inflation by making investments. Investing in the stock market, for example, isn’t risk-free. Investments can fluctuate in value. But, with the right assets and, just as importantly, the right products, investing can be a way to hedge against inflation.

How to Invest in the Most Efficient Way

We can’t tell you which assets to buy. What we can tell you, however, are some of the better ways to buy. For example, if you’re going to invest, you need a tax-efficient vehicle through which to do it, such as a stocks and shares ISA. You also need to know what your potential returns could be to assess whether an investment will produce better returns than a savings account.

A growth calculator works on certain assumptions, but it can show the power of investing via a tax-efficient vehicle compared to saving. For instance, let’s say you plug the following variables into a growth calculator:

• Initial Investment Amount: £1,000
• Monthly/Annual Investment: £150
• Expected Growth: 5%
• Number of Years You’ll Invest: 10 Years

Based on those variables, the project return for your investment would be:

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Amount Invested: £19,000

• Estimated ISA Investment Growth: £5,568.61
• Total Investment: £24,568.61

If you put £1,000 into a bank account with a 0.1% savings rate and invested £150 a month for one year, you’d make £0.23 in interest per month. That’s significantly less than you’d make from an investment.

Again, there are no guarantees the assets you invest in will make a profit. However, they have potential. For example, the average market return for the S&P 500 over the last 20 years is 7.45%. When this is adjusted for inflation, it’s 5.3%. That’s still better than the average interest rate available for savings accounts.

Control the Variables You Can Control

What we’re saying here is that you can make money from investments, but the trick is understanding the market and controlling the variables you can control. The first is understanding your potential returns. The second is, as we’ve said, using a tax-efficient product.

A stocks and shares ISA is tax-efficient because profits are sheltered from capital gains tax. As long as you’re within the annual investment allowance  (£20,000 for the current financial year), you don’t pay capital gains tax on the profit you make. This doesn’t mean you will make a profit. However, it means you can maximise the money you are making by paying less tax. Hedging against inflation is all about controlling the variables you can control.

You can’t stop inflation and you can’t guarantee that the assets you buy will increase in value. What you can do, however, is use a growth calculator to see how much you could make and adjust your budget accordingly. You can then make your investments through a stocks and shares ISA to reduce your tax liability. These moves alone may not provide full protection from the impact of rising inflation. But, in tricky economic times, there can be value in taking action and controlling the variables you can control.

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