Interactive Investor

ii's ‘Real Returns Ready Reckoner’ reveals ravages of inflation

24th January 2022 10:01

Rebecca O'Connor from interactive investor

The tool is a quarterly tracker of returns after inflation on a popular selection of savings and investments, as well as assets.

  • The investment platform will track returns after CPI inflation on a popular selection of savings and investments, as well as other assets.

The rising cost of living is having a significant impact on individual households, with a financial squeeze that is set to intensify throughout the year.

Consumer Price Index (CPI) inflation reached a 30-year high of 5.4% in December last year and continues to rise; at the same time, interest rates are set to increase further from their current rate of 0.25%.

While families grapple with the impact on their daily lives from higher food, energy and petrol costs, these competing economic forces are also making it difficult to know where to store spare money, so it can stand a chance of keeping its value.

To help navigate these difficult decisions, interactive investor has launched a ‘Real Returns Ready Reckoner’, a quarterly tracker of returns after inflation on a popular selection of savings and investments, as well as assets.

When calculated after inflation, cash looks even worse than it does on face value at a real return of -5.23% for an easy access account in 2021, compared with a quoted average rate before inflation of 0.17%; residential property also appears less tempting with a real return of 5% compared with the 10.4% recorded over the year by Nationwide. Meanwhile, the real rate for bonds in 2021, at -7.46% compared with -2.06%, looks especially poor and even stocks and shares are having to work hard, although they stand out for the most comfortable margins of return above inflation in 2021.

Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “It has never been more important to consider real returns – after inflation - when working out the best place for your money.

“The returns for many products such as savings accounts are quoted before inflation, which can give an artificially positive picture for those not aware of the impact inflation has on savings.

“The bad news is that many assets and products are generating negative real returns. The good news is, some, such as stock market investments, are giving inflation a run for its money better than others. The flip side of potentially higher returns through investing over saving is that it comes with risk of loss and of course, past performance is categorically not a guide to future performance. You also have to be prepared to put your money away for a longer term when investing, to ride out market lows. Pensions also come with tax relief, which is an extra leg up on your contributions.

“Whether you are thinking about pensions, investments or savings, it is more important than at any point in recent memory to make sure you are comparing apples with apples and always think about the real return after inflation as well as the quoted figure, remembering the risks associated with each choice, as well as the time frame you are working towards. Generally speaking, well-diversified investment portfolios outpace inflation over the long term.”

Average annual actual and estimated real returns over 12 months to December 2021 , based on 5.4% CPI inflation

Asset/ product type Average annual return, to December 2021  Real return after UK CPI inflation, calculated by ii
Easy access cash savings accounts (interest)* 0.17%  -5.23%
1-yr fixed rate bond (interest)* 0.59% -4.81%
Global equities (MSCI World Index)** 22.90% 17.50%
UK equities (FTSE All Share)** 18.32% 12.92%
Residential property – capital growth*** 10.40% 5%
Residential property – rental yield, gross (November 21)**** 4.98%  -0.42%
Gold ** -2.87% -8.27%
Global corporate bonds** -2.06% -7.46%
ii ISA investor performance- average 13.70% 8.30%
(capital growth and income)
ii SIPP investor performance – average (capital growth and income) 12.20% 6.80%

Source: interactive investor research, January 2022.

Notes to editors

  • *source: Moneyfacts Treasury report
  • **Morningstar Direct
  • ***Nationwide
  • ****Zoopla
  • Ii customer account data is from the ii Private Investor Index

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