Inflation and rate confusion ruining financial resilience

11th July 2023

Inflation ignorance and rate confusion is ruining financial resilience according to research by Hargreaves Lansdown (HL) and Opinium.

The research found that those who understand inflation are more likely to be financially resilient than those who say they don’t. Those who say they understand inflation, but prove to be wrong, have even lower financial resilience. Those who got a question on interest rates right are more likely to be on track with their finances than those who got it wrong.

A separate survey for HL in May asked people how old they were when they learned about key topics. 13% were over the age of 30 when they learned about inflation and 15% said they had never learned. 9% were over 30 when they learned about interest rates and 11% said they had never learned.

Sarah Coles, head of personal finance, Hargreaves Lansdown said “Inflation ignorance and rate confusion take a serious toll on our financial resilience. They make us less likely to be on track with everything from savings to pensions and investment. At a time when inflation is sky high and interest rates are rising, both play a major part in our financial lives. It means millions of people risk making bad decisions because they’ve never had a chance to learn about either.”

“There’s every chance that nobody ever taught you about interest rates or inflation: somehow you were supposed to have picked it up along the way. But while plenty of people get their heads around it, it may take them years, and in some cases, they never get to grips with it.”

“The HL Savings & Resilience Barometer has found that people who don’t fully understand one or the other face much lower levels of financial resilience. It analyses a question from the ONS Wealth and Assets Survey about inflation. People are asked to imagine the inflation rate is 5% and they get 3% on their savings, and then they’re asked whether they will have more, less or the same amount of buying power a year down the line. It also uses a question on interest rates, which asks if someone had £100 in an account paying 2%, and added no money, after one year how much would they have? It then compares the finances of those who get the answer right, those who say they don’t know, and those who get it wrong.”

“Those who understand inflation are more likely to be resilient on all sorts of measures. 70% of them have emergency savings worth at least three months of essential expenses – compared to just 43% of those who got the answer wrong. They’re also more likely to be on track for a moderate retirement income – at 36% – compared to 23% of those who said they didn’t know and 10% of those who got the answer wrong.”

“Both will owe something to the fact that, without an understanding of the impact of inflation, they don’t realise the need to increase their emergency savings or their pension pot as the cost of daily life rises. It’s also likely to come down partly to the fact they tend to be living closer to the edge too – with only 28% having enough cash left at the end of the month to be resilient – compared to 44% of those who understand inflation.”

“This group is also unlikely to be investing as much as they could. To measure this, the Barometer looks at those people who have enough emergency savings, examines the additional money they are saving or investing on a regular basis and scores it according to whether their money is working as hard as it could. Some 24% of those who understand inflation score ‘good’ or ‘excellent’ on this measure, compared to 17% of those who don’t.”

“A lack of understanding of inflation will tend to mean people don’t appreciate the impact it has on their savings, and the fact that it’s eating away at their spending power. Instead, they may just focus on the interest payments, and assume they’re getting richer. It may also mean they don’t appreciate that investments have a better chance of beating inflation over the long term, or understand the potential benefits of investing. It means they risk missing out on this potential growth because they don’t realise the need for it.”

“Those who understand interest rates are more likely to be on track with their finances. 68% have enough emergency savings compared to 49% of those who got the interest rate question wrong. Their pensions are in better shape too, with 45% on track – well ahead of the national average of 39%, and streets ahead of those who got the answer wrong at 14%. 24% also score ‘good’ or ‘excellent for their balance of saving and investing – compared to 17% of those who got it wrong.”