Against a backdrop of a cost-of -living crisis, our Q&A guide to share with clients can help support your conversations with them, as you continue to offer the reassurance and peace of mind your clients may need during challenging times.
Undoubtedly, the UK’s rising interest rates and inflation will be of concern to your clients. In early August, the Bank of England raised interest rates 0.25 percentage points to 5.25% and warned borrowing costs may remain high despite slowing inflation.

Even those clients who aren’t unduly affected by these headwinds will be hearing increasingly concerning messages in the media that may tempt them to reconsider their long-term investment strategies.

At challenging times like these, it’s advisers who are in the best position to reassure clients, and avoid them making short-term, reactive decisions by helping them to understand what’s going on with the economy.

It’s important for your clients to understand that shifts in the macro-economic climate are part and parcel of investing over the long term. “Time in the market” is a well-used term among investment professionals.

As an industry, it’s our responsibility to help clients make informed decisions about their financial futures by, for example, encouraging them to take a step back and look at market events in context.

Sharing fundamental information with clients about the significance of interest rates and inflation can help with that process as well as offering them peace of mind. Our Q&A guide below, to share with clients, should support your conversations when talking about the economy:

1.What exactly is inflation and why is it so high?

Inflation is the rate at which the price of goods and services rise over time – and they do always rise over the long term.
The rate of inflation is published every month by the Office for National Statistics and shows how much prices have risen since the same month a year earlier.

It’s expressed as a percentage, so if inflation is 10%, that means that something that cost £10 a year ago now costs £11.00.

Economists work out the rate of inflation by checking the prices of hundreds of items that people commonly buy, from bread and butter to shoes and socks, and then comparing them to a year earlier.

There are many factors that can influence the rate of inflation.

Sometimes prices increase because the economy is performing well, workers are earning more, and they are spending their extra cash on things that they want.

When demand for these products goes up, suppliers can put up their prices because they know that customers can afford to pay more.

At the moment, the situation in the UK is different.

Suppliers are putting their prices up because things have become more expensive to make and they have to pass their extra costs on to consumers or face making a loss.

The war in Ukraine is a big part of that, pushing up manufacturers’ energy bills, and lots of raw materials used to make products have become more expensive to buy too.

For example, the price of sugar shot up after the pandemic, largely because production slowed down during lockdown. Now, there’s not enough to go round, and bad weather in countries where sugar cane is grown has made the problem worse.

2. When will inflation come down?

While inflation appears to have passed its peak, it’s still very high.

But the Bank of England says it expects inflation to fall significantly during 2023.

That’s because wholesale energy prices have fallen, and energy suppliers will soon be able to cut the prices they charge businesses.

This means manufacturers will be able to reduce the price they charge for their products because they are no longer as expensive to make.

At the same time, producers around the world are recovering from the pandemic and ramping production up, so more availability of products from milk to microchips will make them cheaper.

Finally, because prices are so high, people have less money to spend, so they buy less.

This helps bring prices down because shops make things cheaper to boost demand.

3. What’s the connection between interest rates and inflation?

We’ve seen that, when things get more expensive, people buy less, which helps bring prices down, because shops make things cheaper to boost demand.

So, to make life even more expensive for consumers, the Bank of England can put up interest rates.

This means people have less money to spend, because the monthly payments on their mortgages, credit cards and overdrafts go up, so they can’t afford to buy as many products.

At the same time, they earn more interest on their savings, so they will be inclined to keep their money in the bank and watch it grow, rather than spend it.

The government has a target to keep inflation at 2%, which it thinks will help stabilise inflation, so people and businesses can plan for the future with confidence. 

Because the current rate is well above that, the Bank of England is putting interest rates up in the hope it will bring inflation down.

The value of advice
In a challenging economy, as well as sharing fundamental information with clients about the significance of interest rates and inflation, they can be reassured that you’re actively monitoring their portfolios – and demonstrating to them the value of their adviser.

Take a look at our Adviser Insights ‘Your business’ blogs for further support for your firm. 

The value of investments can go down as well as up and your clients could get back less than they paid in.

The views expressed in this blog should not be regarded as financial advice.