High inflation exposes generational divide

Surging inflation is something that millions of young people have never had to deal with before, and it’s exposing many for the first time to the value of a long-term financial plan.

Millennials are not unaccustomed to living through volatile economic events. They watched their parents worry when the dot-com bubble burst at the turn of the millennium and global markets crashed in 2008, and they felt the brunt of the financial impact through the Covid crisis. One thing they have never had to deal with, however, is rapid inflation – up until now.

With inflation hitting 9% in the UK last month and expected to reach double figures later this year, and interest rates rising at the fastest rate in decades, the younger generations are not only likely to be hit hardest by the cost-of-living crisis – they’re also the least prepared for it.

Many are understandably confused. Through the global financial crisis, there was a very clear culprit for investment values falling steeply – so called greedy bankers – but the crash at least followed a period of strong economic growth. The Covid crisis had a similar effect on portfolios but people were understanding about the impact of a once in a lifetime pandemic. People were far more concerned about the health of their families and state of their businesses.

This time around, not only does it feel like there has been little if any respite from the last wave of economic turmoil through Covid, but it has caught people by surprise. Many expected a post-Covid economic boom akin to the 'Roaring Twenties' which followed World War 1 and the Spanish flu outbreak. Thanks to inflation, this “boom” was very short-lived, and instead we have been greeted with the biggest real-terms fall in incomes for 50 years.

Instant gratification

High student loan debt, low-cost credit and the seemingly mountainous task of getting on the housing ladder has given many millennials a propensity to spend today rather than save for tomorrow. Known for their desire for instant gratification, having been the first generation to grow up through the immediacy of social media and digital services, they have also been known to gamble in risky cryptocurrency markets in the hunt for a quick, steep return.

Yet while high inflation will be no doubt challenging, with rising interest rates likely to make it even harder to get on the housing ladder, it does present an opportunity to learn lessons that baby boomers were forced to learn about the value of a robust, long-term financial plan.

“If we assume interest rates continue to rise in the next few years, then the younger generations are going to be hit hardest, even if mortgage rates settle at 2 or 3%, these will be levels they have probably never encountered,” says Ian Phillips, Independent Financial Adviser at Ascot Lloyd. “In an inflationary environment, you really learn the value of money, you learn the value of debt and you learn the importance of overpaying. That has been lost among the younger generation.

“It's human nature to want quick returns but for mainstream investing it just doesn't work. We saw this in the lead up to the tech bubble crash in 1999 where the media was full of adverts for the Aberdeen and the Scottish Equitable Technology Funds which were producing triple digit returns in 12 months. Money was piling into this because everybody assumed that it was just a gravy train of returns that you couldn't avoid. When 1999 hit a sizable proportion of funds held in that sector disappeared almost overnight.”

Rude awakening

Increases of just a few percent each year on investment portfolios might seem incredibly small to millennials who have dabbled in the crypto market, for instance, but education is required from schools, government and indeed parents on the diversity of assets that enable people to plan for the future. A study by Profile Pensions last year found that despite auto-enrolment, a third of millennials are not saving into a pension, which needs to change.

There are also significant generational differences between older people who tend to want to hold cash and younger people who want to invest and work on much lower cash reserves. A recession, should one arrive, will be a rude awakening to generations who assume money invested always goes up. There are no quick wins in a robust financial plan.

Education on cash savings is particularly needed. Though cash will quickly lose value in a period of high inflation and what are still relatively low interest rates, it is an important part of a long-term financial plan which protects savers from shocks. Ascot Lloyd Financial Adviser, Ian Phillips has always advised his clients to hold approximately 12 to 18 months of their expenditure in cash reserves.

“When you're beginning the process of considering investment planning, there might be pension pots and ISAs but from my perspective, clients should also hold cash, so in dire circumstances; global recessions, job losses, or reductions in income sources, you’re protected” he says. “When your portfolios are reducing in value, as they have been in recent months, taking additional withdrawals may not be the sensible thing to do. If you've planned sensibly, cash reserves and other safe assets will help weather the storm when it arises.”

All is not lost for the millennial generation, who are mostly likely to benefit from wage growth as well as interest rates which will remain reasonably low by historical standards. However, if the return of high inflation does anything positive, it should encourage younger generations to recognise the value of a long-term financial plan and consider engaging with a financial adviser today. It’s never too early to start building a plan for your financial future.

Ascot Lloyd’s independent financial advisers work closely with their clients to assess their individual circumstances and guide them on the ways in which they can meet their goals.

If you think a member or your family or a friend could benefit from independent financial advice, please contact your Ascot Lloyd financial adviser; they would be happy to start a conversation and begin creating a sensible, long-term financial plan.

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