A guide to protecting your savings from inflation
Summary
As the cost of living crisis in the UK worsens, a question more and more people are starting to ask is how to protect savings from inflation. In recent years, the cost of essentials has risen sharply, from groceries, to energy bills, transport and even rent , the purchasing power of the pound is clearly being eroded.
Meanwhile, the interest rates offered by bank savings and ISA accounts is barely enough to keep pace with inflation. To make matters worse, inflation could remain elevated for the foreseeable future. Why? Because national debt is at record levels while government spending shows no signs of slowing down.
This guide covers:
- Why your money is losing purchasing power
- UK inflation risk in 2026 and beyond
- Cash savings vs gold ownership
- Real interest rates vs nominal interest rates
- The best inflation hedging strategies
- Summary: how to protect savings from inflation
What is inflation?
Inflation is the rate at which prices increase over time. Any level of inflation above 0% effectively means that goods and services are rising in price over time. Or flipped around, it means that the pounds you own are losing purchasing power over time.
The Bank of England’s inflation target is officially 2% and for many years now, UK inflation has remained above this target. What’s important to understand is that even if this target is achieved, it will still mean prices are increasing across the economy year after year.
Pretty much everything costs more today than it did even just ten years ago, and this trend is set to continue. Those holding large cash savings could watch their purchasing power shrink over time, while those who own assets, like gold, are better positioned to ride out the inflation storm and preserve their wealth.
What causes inflation?
Inflation can be driven by several factors, some unavoidable and some driven by government policy. However, before we dive into what these drivers are, there’s a crucial bit of context to understand here: Inflation benefits the government.
Why? Because it reduces the real value of national debt.
Let’s unpack this. Inflation allows the government to spend beyond its means knowing that over time, the debt will effectively be eroded by inflation. A £3 trillion debt might seem like a lot today but over time, that amount won’t be worth as much. The downside is that neither will the pounds in your bank account.
In this way, the government is essentially passing on the cost to you.
Causes of inflation:
- Government spending: When the government spends beyond its means, it leads to upward pressure on prices.
- Government borrowing: Persistent borrowing to fund spending programmes increases national debt.
- Monetary policy (money supply expansion): Increasing the money supply dilutes the value of the pound sterling
- Rising energy costs: If energy costs go up, it forces businesses to increase prices.
- Global supply and demand imbalances: Geopolitical issues can cause disruptions to supply chains that lead to higher prices globally.
Why your money is losing purchasing power
If you’ve been building your savings in pounds over time, the uncomfortable truth is that your money is losing purchasing power. Prices across the economy have risen faster than wages, and to make matters worse, even the best savings and ISA accounts only offer interest rates of around 5% per annum. That’s barely enough to keep up with inflation.
So how did we get to this point? Let’s take a quick trip down memory lane:
- The 2008 financial crisis: where it all started
After the global financial crash in 2008, central banks around the world, including the Bank of England, cut interest rates to near zero. This helped stabilise the economy in the short term but it also increased the supply of money in the system. - A decade of low rates and cheap money
For years, borrowing remained cheap. This meant the government, business and even households took on more debt. - Covid-19 and massive stimulus (2020–2021)
In response to the Covid pandemic, the government began stimulus spending on initiatives like furlough schemes and business support programmes. This increased the supply of money in the economy even further. - Energy shocks and global conflict (2022 onwards)
Ongoing conflicts and geopolitical issues have disrupted supply chains, driving up energy costs. When the cost of energy goes up, it has a ripple effect that drives up the cost of everything else from transport to manufacturing to consumer goods.
Understanding this context is crucial because it reveals that the current inflationary environment is not short term in nature. It is both global and long lasting.
UK inflation risk in 2026 and beyond
There’s an inconvenient truth we need to face. Inflation could remain elevated for years to come.
Here’s why:
- National debt is very high
The government is likely to implement policies that lead to higher inflation as a way to dilute the real value of national debt over time. - Reckless government spending
The UK government continues to spend beyond its means. This may help to plug short term gaps but it risks keeping prices elevated - External shocks and geopolitical turbulence
Disruptions to global supply chains have made it more expensive to produce and transport essential goods. When supply is restricted but demand remains, prices rise.
In 2026 and beyond, inflation risk is high. The overwhelming likelihood is that prices will continue to rise across the economy meaning the purchasing power of cash will continue to diminish.
Cash savings vs gold ownership
Before the digital age, cash had a number of unique benefits that made it preferable even during times of inflation. You can pay for things with cash, store it at a bank instead of in a safe, and when payday comes, it just goes straight into your account.
However, gold has been given a digital makeover. Instead of queuing to buy physical gold, there are various apps that allow you to buy gold.
TallyMoney is leading the way here by offering a full savings account that converts your pounds into gold instantly. And just like a regular bank, you can spend from your balance in any currency. You even get a Tally Debit Mastercard® that you can use anywhere in the world. This changes the game as the benefits that cash once had over gold are now effectively features of both. TallyMoney gives you the best of both worlds – the inflation protection of gold, with the spendability of cash.
It’s important to remember that gold has been used as a store of value for thousands of years, and it continues to play that role today.
Here’s why:
- It has a limited supply
Gold cannot be printed out of thin air in the same way as fiat currency. - Globally recognised
Gold is valued and accepted around the world. - Neutral and independent
Gold is a neutral asset that is not subject to the policies of any single government.
But gold doesn’t pay interest?
It’s true, you don’t earn interest by holding gold. However, gold’s capital growth tends to outperform bank interest rates significantly.(SOURCE: ) In fact, since the year 2000, the price of gold has averaged over 11% growth each year. That’s more than double the annual interest you would earn from holding your savings in even the best ISA account.
And we haven’t even factored in inflation yet. Your bank may advertise an interest rate of 5% but what they don’t tell you is that to calculate your real interest rate, you need to minus the inflation rate.
So if inflation is at, say 3%, then the real interest rate you would earn would actually be 2% (5% – 3% = 2%).
Whilst it’s true that the price of gold can fluctuate in the short term, it’s proven to grow over the long term. This is why owning gold is more important than ever.
The best inflation hedging strategies
During periods of high inflation, the cash you own is likely to diminish in terms of purchasing power. For this reason, many people move their savings into assets. Assets have the potential to grow in value. The most common assets include property, stocks, crypto, and of course gold.
Each asset class has its pros and cons, however in the context of inflation hedging strategies, gold stands out. Not only has gold been used as the ultimate hedge against inflation for thousands of years, but it is also the most accessible, the safest, and offers amongst the highest capital growth.
Let’s review each asset class:
1. Property
Buying a property can be a great way to hedge against inflation. As an asset class, it offers the potential for high capital growth and even the possibility of rental yield.
However, property is relatively expensive compared with other asset classes. Moreover, buying and selling properties can be a slow arduous process.
2. Stocks and shares
Stocks and shares can offer high capital growth and monthly income in the form of dividends.
However, the stock market can experience sharp corrections and during times of high inflation, central banks are less likely to cut interest rates, limiting the potential for capital growth.
3. Bitcoin and cryptocurrencies
Bitcoin and the crypto market have delivered rapid growth in a relatively short space of time. But with that comes volatility. As an asset class, crypto is still in its infancy and crashes of 80% are common.
Blockchain and distributed ledger technology have a bright future, but for the time being, trading crypto is more about making quick gains than being a hedge against inflation.
4. Gold
Gold stands apart from other asset classes, particularly in times of inflation:
- Long-established store of value:
It has preserved purchasing power across centuries and multiple economic cycles - Independent of financial systems:
Its value is not directly tied to corporate performance or government policy - Relative stability:
While it does fluctuate, it is generally less volatile than more speculative assets like cryptocurrencies - Accessible:
In the digital age, you can buy gold through your smartphone in a matter of minutes - Spendability:
TallyMoney lets you build your savings in gold, and spend from your balance in any currency.
Summary: how to protect savings from inflation
Complacency is the real wealth killer. Inflation builds up gradually without you noticing. Things get more expensive in the background. The longer you leave it, the less you’re able to buy with your money over time.
Those with large cash savings are likely to see their purchasing power decline over time unless they move their money into an inflation hedge. Gold stands out as the asset which is tailor-made for savers. It has been used as a store of value for thousands of years, delivering consistent, stable growth. It is globally recognised, has a limited supply and is not subject to the policies of any single government.
TallyMoney has made it quick and easy to convert your pounds into gold and even convert them back into pounds (or any currency for that matter) when you want to buy things. You get all of the benefits of a regular bank account, just without the inflation part.
