how inflation affects your investments

Few savers remember the impact of rising prices on their investments, as inflation has disappeared from the radar in recent years. Yet the consequences are very real.

Inflation first of all has a mechanical effect on the return on savings. For example, the Livret A brought in around 0.50% gross in 2020, with consumer prices rising 0.50% as well. The real return on the passbook was therefore zero, that is to say it simply served to maintain the purchasing power of savers. But, when inflation exceeds the nominal rate served, the real return becomes negative.

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The second effect is through interest rates. In fact, if inflation is too high, central banks will have to intervene to limit its surge. This could take the form of a reduction in « quantitative easing » (massive purchases of securities on the markets) currently in place, then, as a second step, an increase in key rates. Long-term (ten-year) interest rates would then follow the same path.

The effect on life insurance

In practice, precautionary savings are the first affected in this case. Demand deposits and passbooks, not or poorly remunerated, see their real returns fall into negative territory. At least in the short term for regulated savings, because the remuneration of the latter would rise quickly enough to take account of the rise in inflation. Indeed, the Livret A rate, which is based on the half-yearly average between interbank interest rates and inflation, is reviewed twice a year.

Savings placed on the euro life insurance fund would be little more advantageous, as the average return in 2020 was 1.3% before social security contributions. A slight rise in inflation would therefore be enough to start the purchasing power of policyholders.

On the other hand, a gradual increase in long rates would, in the longer term, be beneficial to funds in euros. In fact, the yields of new bonds issued on the market would then be higher, allowing insurers to invest in better remunerated securities.

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“On the euro fund, it would take a very structural and lasting rise in rates to return to the level of ten years ago, nuance however Mathilde Sauvé, director of development of La Banque Postale AM. In the event of a rise in rates, this would simply limit the erosion of the yield. “

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