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Question: How many short-term blips does it take to create a new normal?
It’s a question we should all be asking ourselves regarding the hot topic that is inflation. For having become accustomed to a world of low-single digit inflation in the decade or so following the financial crisis— the consumer price index (CPI) in the UK averaged roughly 2.6% p.a. throughout the 2010s— a series of ‘blips’ has meant inflation is back. In the five-year period between 2020 and 2025, UK CPI has averaged 4.64% on an annual basis.
If inflation persists at these higher levels for years to come, and there are structural reasons to suggest it could, this will have profound implications for the long-term purchasing power of cash. The good news is holding other asset classes in a diversified portfolio, such as equities and real assets, can help protect against persistently high inflation.
What has changed
The step-change in price growth can be traced back to the reopening of economies following Covid-19.
Inflationary Blip#1: The post-pandemic collective release of pent-up demand, not just in the UK but across the world. Supply struggled to match higher demand causing prices to spike higher. Back then, the consensus view was that this would be temporary and that once supply chains caught up and demand eased off, inflation would fall.
Unfortunately, Inflationary Blip#1 coincided with Inflationary Blip#2: Russia’s invasion of Ukraine. This triggered an energy price shock which, along with the post-Covid-19 surge in demand, saw annual UK CPI jump from 2.6% in 2021 to 9.1% in 2022, the highest in almost four decades.
Belated central bank action in the form of sharp interest rate rises saw inflation fall back—by 2024, UK CPI had dropped to 2.5%. Since then, however, more blips have pushed inflation back up. US President Trump’s Liberation Day tariffs in April 2025 helped inflation hit 3.4% in 2025. The recent Middle East conflict threatens to keep inflation in the 3-4% range for 2026. The overall impact? Consumer prices are now ~32% higher than in 2019, according to the Bank of England inflation calculator. It’s not just an issue in the UK. Inflation across Europe and the US remains ~3–4%.
Why inflation may stay higher
The cumulative effect of all those inflationary blips has meant market signals, such as higher longer-term inflation breakeven rates, are suggesting investors are increasingly pricing inflation as a persistent feature rather than a temporary shock.
That’s because structural forces are at work. The origins of some of these can be traced back to those inflationary ‘blips’. Russia’s invasion of Ukraine, Trump’s trade wars and the Middle East conflict have all increased geopolitical instability and, in some cases, caused energy price shocks. This in turn has threatened to turn back the tide of globalisation, a driving force behind the benign price backdrop enjoyed pre-Covid-19. De-globalisation and supply chain fragmentation, on the other hand, can be expected to be inflationary.
Heightened geopolitical tensions have increased calls for re-shoring and higher defence spending, all at a time, when fiscal deficits and government spending levels are high. Add to this, ageing populations, labour shortages and a reluctance to induce recessions and there is no shortage of structural drivers that suggest the era of low inflation has been replaced by a ‘higher-for-longer’ one.
Why this matters
This is a material shift. Rising prices act as a continual ‘inflation tax’ on cash and fixed income. It follows the higher and longer prices rise, the greater the ‘inflation tax’ take:
- 3% inflation: ~25% loss in purchasing power in 7–8 years
- 4% inflation: ~33% loss over 10 years
- 6% inflation: ~50% loss over ~12 years
And this is happening now. We are all feeling the effects of higher inflation through higher living costs today. But if cash deposits consistently earn below the rate of inflation, real value can be expected to erode in the future too.
What this means for clients
A useful way to frame how in real terms the value of money will be steadily eroded by inflation is through real life timelines — retirement, grandchildren, or multi decade planning — where the compounding effect becomes tangible. This is even more important given increased longevity. A 60-year-old couple today, for example, face a 25–30-year retirement horizon, meaning longer ‘health spans’ and extended periods of active spending.
Take a child born in the first Covid-19 lock down who is now starting primary school. The purchasing power of £100,000 back in 2019 is equivalent to £132,000 today.
The ‘inflation tax’
The question is, how much more capital is needed to offset the ‘inflation tax’ and maintain purchasing power? Each figure in the table below shows how much additional capital is required to buy the same goods after inflation.
| Inflation Rate | |||||
| Years | 2% | 3% | 4% | 5% | 6% |
| 5 years | +10% | +16% | +22% | +28% | +34% |
| 10 years | +22% | +34% | +48% | +63% | +79% |
| 15 years | +35% | +56% | +80% | +108% | +140% |
| 20 years | +49% | +81% | +119% | +165% | +221% |
| 25 years | +64% | +109% | +167% | +239% | +329% |
| 30 years | +81% | +143% | +224% | +332% | +474% |
Tomorrow’s money won’t buy the same bread
A look at lost purchasing power shows the damage inflation can inflict on the real value of cash. As the table below shows, inflation steadily reduces what your money can buy:
| Inflation Rate | |||||
| Years | 2% | 3% | 4% | 5% | 6% |
| 5 years | -9% | -14% | -18% | -22% | -25% |
| 10 years | -18% | -26% | -32% | -39% | -44% |
| 15 years | -26% | -36% | -44% | -52% | -58% |
| 20 years | -33% | -45% | -54% | -62% | -69% |
| 25 years | -39% | -52% | -62% | -70% | -77% |
| 30 years | -45% | -59% | -69% | -77% | -83% |
Bottom line
Idle cash sitting on deposit is less likely to be a neutral strategy. At 3–4% inflation, cash can become a depreciating asset in real terms. In such an environment, protecting purchasing power ought to remain central to portfolio construction. With this in mind, clients should consider allocating excess cash towards assets with stronger inflation resilience. These include:
- Equities with pricing power
- Index-linked gilts which currently offer positive real yields
- Real assets
- Diversified portfolios that can compound ahead of inflation
Then there are conventional fixed interest securities such as government bonds. While the fixed coupons are vulnerable to inflation, current yields have already risen substantially so that they are comfortably higher than those offered by cash and therefore offer a buffer. And if held outside a tax shelter, government bonds can be more tax efficient.
Final word
Inflation does not need to return to 1970s levels to damage wealth. Low-to-mid single-digit inflation over long horizons is enough. It’s time to consider putting excess cash to work to help avoid any unwelcome blips in long-term purchasing power.
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