The rule of 72

In the UK and elsewhere around the world, we are witnessing an inflationary surge not seen in more than a generation. The Bank of England, increased interest rates in the UK recently by 0.5% to 1.75%, its sixth consecutive rise and the biggest single increase since 1995. This was their response to the 40-year high inflation rate of 9.4%, but worse still, the Bank predicts inflation may hit 13.3% by October as winter energy bills increase again.

For longer term charities, and especially those with memories of the 1970s, making sense of inflation can be difficult. As we know inflation is a significant concern because it has the capacity to destroy the value of your investments.

A handy way to understand the effect of inflation on a fixed income is by using the so called Rule of 72. All you have to do is divide the inflation rate into 72 to work out how quickly your capital will halve in value. For example:

• With 4% inflation £50m will only have £25m of purchasing power in 18 years, assuming nothing else changes (72 ÷ 4 = 18).

• With 13% inflation it will halve in value in 5½ years. The (possibly) good news is that this rule assumes inflation stays at 13% for all of those years. Let’s hope it doesn’t.

While Yoke will not predict the future of inflation, it seems even Central Banks are not good at it, we must assume charities will have to suffer higher inflation for a while to come. This will but pressure on your finances and if you are worried about what actions to take, please do not hesitate to contact us.