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Summary

An annual rise of 5.5% in the Coutts Luxury Price Index (CLPI) highlights the ‘hidden’ inflation that can erode your wealth.

6 min read

If you enjoy the finer things in life, the prices you pay are rising faster than mainstream inflation implies.

Our research shows that prices for luxury goods and services are rising much faster than the latest inflation rate released by the Office for National Statistics (ONS). The Coutts Luxury Price Index (CLPI) shows that luxury items are increasing at a rate of 5.5% compared to the latest Consumer Prices Index (CPI) data released by the ONS on 23 May 2018 of 2.4%.

Anyone buying luxury goods and services will see the spending power of their wealth decline much more quickly than headline inflation suggests unless they take action to secure a higher return on their savings. 
 

How ‘hidden inflation’ affects you

Your exposure to this ‘hidden’ inflation will be higher or lower, depending on your spending habits. We estimate that a consumer who spends 50% of their money on luxury goods will be exposed to inflation of 3.9% at current rates.

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This shows that living the good life doesn’t just take more money. You need to make sure that the wealth you have is growing significantly faster than headline inflation.

Sven Balzer, Head of Investment Strategy at Coutts, said that falling CPI is unlikely to provide any relief for savers. "Inflation in luxury goods is still much higher than the average return on cash, and is likely to remain so for the foreseeable future. While cash has its place in a portfolio – it has low risk and is usually easy to access in the short-term – anyone looking to maintain the spending power of their wealth in the long term should consider a diversified investment portfolio alongside cash holdings."

The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.
 

The four ages of inflation

As your spending habits change throughout your life, inflation will affect you differently. Understanding these effects will help you plan effectively to ensure you can sustain the lifestyle you want in the long term.

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20s
Exploring and enjoying life

This is when your capital is most at risk from inflation. Assuming an average rate of inflation of just 2%, the spending power of a pound will fall to 41p by the time you’re ready to retire in 40 years’ time.

This shows the importance of acting early to help protect your wealth from the effects of inflation through investment. Investing in a diversified portfolio of different asset types gives you a better chance of achieving an above-inflation return for your long-term savings than leaving your money in the bank.

This makes your 20s a good time to think about making the most of any savings vehicles such as an ISA. Making the most of your ISA allowance each year in a stocks and shares ISA (£20,000 for the 2018/2019 tax year) could see you build up a substantial lump sum over the years that’s free from UK capital gains and income tax. Please speak to your private banker to receive the full report.

Tax reliefs referred to are those applying under current legislation, which may change. The availability and value of any tax reliefs will depend on your individual circumstances.

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Where you’re hit hardest:
Twenty-somethings enjoy owning the latest mobile phone and want to wear the latest fashion.

30s to 40s
The nest builders

Through your late 30s and as you enter your 40s you’re likely to be setting up a home and settling down, and your spending patterns change.

This is the time that you might really start to think about the future. Make sure you're making the most of your occupational pension, if you have one. If you don't have a pension from your job - for example, if you're self-employed - you might want to start a pension now to make the most of tax reliefs offered to pension savers.

By this stage of your career, you may also have accumulated a number of pension pots from different provider, including from different workplace schemes. You could consider bringing your pensions together in one place – this can help you keep track of how much you’ve saved towards your retirement and you might even pay lower pension charges overall. However, you’ll want to check each plan carefully to make sure that you don’t lose any additional benefits by transferring. Please speak to your private banker to receive the full report.

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Where you’re hit hardest:
As you look to starting a family you’ll be anticipating fewer nights out, and so you might want to take advantage of the cultural and recreational opportunities while you can. And when your children do start to arrive, there’ll be more mouths to feed adding to your exposure to rising food costs.

40s to 50s
Nurturers and providers

By this time many people are well established in their careers and providing for a family. It’s a busy stage of life with a lot of responsibilities at work and home.

In many households, there may be only one full-time earner. This means you need to be even more focused on preserving the spending power of your wealth over the long term, making sure you are providing for your own – and your partner’s – future. Please speak to your private banker to receive the full report.

Find out how Coutts could help preserve the spending power of your wealth

Where you’re hit hardest:
In these years, you’re likely to be exposed to rising school fees as you support your children through their education. And this is the time in life when your earnings are likely to be taking off, so you may have the opportunity to treat yourself to a few luxuries or even buy that sports car you’ve been dreaming of for years.

60s and beyond
Reaping life's rewards

As we enter our 60s, many of us are starting to withdraw from working life to turn our attention to enjoying the wealth we have created. For many, this means leaving a regular income behind in favour of taking pensions savings, selling a business and turning to money you have invested in the intervening years.

Now, however, you’ll be relying on savings rather than income to finance your life. Inflation is now your number one enemy – earnings typically keep pace with inflation, but cash held on deposit is at risk of losing its value because of inflation. If you don’t invest wisely, you could see your spending power declining as inflation does its damage.

At this time of life you’ll also want to start thinking about your legacy. Whether you want to leave money to charity or your children, you’ll want to make sure that you protect your heirs from inflation as well as yourself. Please speak to your private banker to receive the full report.

Find out how Coutts could help you plan for your and your children’s future

Where you’re hit hardest:
Maintaining your standard of living will now be a key concern, with household costs rising. It’s also the time to enjoy the finer things in life, and so you may spend more on luxury wines or your wellbeing.

Looking at the numbers

The CLPI provides a meticulously researched, accurate measure of the effects of inflation on high-end goods and services. It complements the UK Consumer Price Index (CPI) to reflect the luxury portion of our clients’ spending.

As many luxury goods and services are in fundamentally short supply, their prices may not always move in line with the wider market. Tracking the prices of these assets helps us understand the effects of inflation on the real value of our clients’ wealth and their savings needs.

The CLPI tracks the price of 142 goods and services across 12 categories that mirror the mainstream CPI, focused on luxury and high-end items. These include high-end mobile phones, private school fees, Savile Row suits and luxury cars.

Some categories are moved by events quite specific to individual items. The price of whisky, for example, has risen rapidly in recent years as investors have broadened their scope away from just wine in their search for ‘alternative’ investments.

Others are driven more by macro factors. Two notable contributors in the last six months have been the continued strengthening of sterling, which has muted some overseas price increases, and the c.75% increase in the price of oil, which has had a broader impact on prices as a whole.

You’ll find a more detailed analysis of the categories and the drivers of prices in the full report - please speak to your private banker to receive a copy.

Source: Coutts & Co

To find out more about how to keep pace with inflation and establish a wealth strategy that works for you, contact your private banker or explore coutts.com

Important information

Tax reliefs referred to are those applying under current legislation, which may change. The availability and value of any tax reliefs will depend on your individual circumstances.

You can only subscribe to one stocks and shares ISA and one cash ISA in each tax year – and you can only put a total of £20,000 into your ISAs in the 2018/19 tax year.

Cash ISA available only for those aged 16 years or over and resident in the UK for tax purposes. Stocks and shares ISA available only for those aged 18 years or over and resident in the UK for tax purposes.

Coutts Invest only available for users of Coutts Online aged 18 years or over and resident in the UK for tax purposes.

The above commentary is based on our understanding of current tax law, which is subject to change in the future. The availability and value of any tax reliefs will depend on your individual circumstances and you should obtain tax advice before making any decisions.

Past performance should not be taken as a guide to future performance.

Key Takeaways

Our research shows that prices for luxury goods and services are rising at 5.5% a year, more than double the mainstream rate of inflation. If you enjoy life’s luxuries then you need to be even more aware of corrosive effect of inflation on the spending power of your wealth.

About Coutts investments

With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.

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