Why Gen Z should care about inflation

The inflation tiger is roaring. Older people can hear it. How about younger ones? Inflation could, after all, be the biggest blow to their finances in their lifetime.

They don’t seem hugely concerned. According to polling by GfK, Generation Z is totally ‘chill’ about inflation. Older generations, meanwhile, are scarred by the last inflation spiral of the 1970s — a brown-tinged decade of power cuts, unemployment and grim donkey jackets. To younger people, that’s ancient history. Growing up in an era where inflation has averaged 2 per cent, they’d be forgiven for zoning out when they hear ‘back in the day…’ or when news reports reveal that inflation has spiked to 4.2 per cent — a peak not seen since November 2011.

The reality is that Gen Z doesn’t really know what inflation is, let alone whether it’s back with a vengeance. But inflation bites the young hardest. Recent research from Demos and Yorkshire Building Society found young people typically spend more than twice as much as the over-fifties on housing costs and basic bills, both inflationary sore spots, equivalent to £1,300 more per month. Nearly half also report having ‘poor financial resilience’ due to too much debt and not enough savings.

Some argue that inflation (and a higher base rate) is a young person’s friend, not foe. It erodes debt, makes savings more attractive, and raises wages. It might even bring house prices into reach. Well, that’s a rather optimistic ‘read’, to use another Gen Z buzz-word. Borrowers can only fix interest rates up to a point, with better deals reserved for those with established credit profiles. Also, the big banks are much quicker to pass on rate rises to borrowers than to savers. The housing market is widely predicted to slow down or even flatline if the base rate rises to its expected rate of 1 per cent by the end of next year. Even so, it’ll hardly crash down to levels most young people would deem ‘affordable’.

Younger workers can theoretically use inflation to secure pay rises. Sectors with rising vacancies and low productivity are raising wages. Employees who feel hard done by are joining the #quitmyjob movement on TikTok, posting videos in which they dramatically resign to send a public signal to ‘toxic’ bosses. But even if Gen Z can negotiate higher pay across the board — far from guaranteed — it might not be enough to mitigate tax rises to fund health and social care, the freezing of the personal tax allowance and a likely reduction in the student loan repayment threshold all coming down the track.

What should savvy young people be doing? How about an inflation audit alongside regular budgeting sessions to find out which daily and monthly costs have risen? They need to start keeping receipts so they can itemise their purchases: digital banking only gives you one total cost per transaction, concealing the prices of multiple items. The investment house Rathbones has created a rather handy inflation calculator for anyone who wants to work out their personal inflation rate (rathbones.com/personal-inflation-calculator).

Young borrowers also need to keep their credit lines as lean and efficient as possible, using them chiefly to build their credit worthiness. They’ll have limited options when it comes to rising energy bills, but they can switch or haggle down their mobile contract, home broadband and insurance policies when they come up for renewal.

We all need an easy-access savings buffer worth at least three months of earnings. Smaller banks like Shawbrook and Cynergy Bank offer the best rates here. Beyond that, we need to get our cash working as hard as possible. We can tie it up in longer-term notice accounts or fixed-rate bonds, but these may still fall behind inflation.

So consider the Lifetime Isa (LISA), which provides a juicy tax-free bonus for those aged 18 to 39 who are saving for their first home (or retirement). With the government chucking £1,000 towards your deposit if you save the maximum £4,000 every year, that’s an effective interest rate of 25 per cent, trouncing all other accounts on the market. The only downside is a nasty penalty charge of 25 per cent on any money withdrawn prematurely.

Young savers could try to ramp up the returns on their LISA by investing it, rather than leaving it in cash, but only if their home-buying dream is at least five years away and they can brave the possibility of losing their entire deposit in the worst-case scenario. Whether they invest through a LISA, or a general stocks and shares Isa, they should always mitigate their risks by diversifying their portfolio and largely leaving it alone once they’ve set their strategy.

It pays to be realistic, though. Data compiled for this year’s Credit Suisse Global Investment Returns Yearbook predicts that Gen Z investors can expect to make just 2 per cent in annual returns on a 70/30 portfolio of stocks and bonds in the coming decades. It is a third of the returns enjoyed by previous generations.

This outlook may be overly gloomy. Investing more in equities, particularly so-called ‘value stocks’, as well as keeping charges as low as possible via exchange traded funds, might help. But even if young people ticked all these boxes, they would never fully escape the harm of rising taxes, lower take-home pay, and a more expensive way of life in the future. In the words of Gen Z’s favourite singer, Olivia Rodrigo: ‘God, it’s brutal out there.’