2024 proved to be a year for unprecedented opportunities and challenges throughout global stocks and shares, but will 2025 see inflation haunt Stocks and Shares ISA holders throughout the United Kingdom?
So far, 2025 has gotten off to a choppy start, with the S&P 500 retracing from historic highs as tech competition in China and the unpredictability of Trump’s return to the Presidency sparked a period of volatility on Wall Street in January.
But the underlying concern for the year ahead among ISA holders will be inflation, and the danger of returns being eaten into by the soaring cost of living.
Inflation remains a risk for investors to watch out for in 2025, and there’s tangible concern among Cash ISA investors that the soaring Consumer Price Index (CPI) undermines the rate of returns offered by their fixed-rate savings accounts.
With the Bank of England’s own inflation forecast predicting a rise to 2.75% by the second half of 2025 before settling lower, is there a danger that your Stocks and Shares ISA could be damaged by sticky inflation over the year ahead?
What is Inflation?
Before we look at how inflation can impact your Stocks and Shares ISA, let’s take a moment to cover what inflation actually is and how it works.
While £1 will always be worth £1, the GBP value for things like food, fuel, and energy increases due to inflation, meaning that your £1 will be capable of purchasing fewer things.
Inflation can be triggered by a number of factors. During the post-pandemic recovery period, inflation soared as government stimulus packages and supply chain shortages saw demand for goods like electronics rapidly rise beyond its supply.
Likewise, there are fears that Donald Trump could trigger a rise in inflation as the President adds tariffs on some international trading partners, causing the cost of goods to increase which could then be passed on to consumers.
Inflation means that if your money is in a low-interest bank account or an ISA, the decreasing value of the pound in real terms will eat into the value of your savings.
If, for instance, inflation was 4% for the entirety of 2025, every £1,000 you save would have depreciated to £962 in real terms, despite no money being lost.
What Does This Mean for Your ISA?
During periods of sticky inflation, it’s imperative that you have an ISA that’s outperforming the Consumer Price Index, or else you’re actively losing value in your savings account.
Cash ISAs can be especially vulnerable to inflation because fixed rates agreed upon in the past could fail to outperform inflation if an unexpected increase occurs.
If the UK reenters a period of low interest and high inflation, like where we were in early 2022, Cash ISAs linked to the Bank of England’s base rate will be unable to grow your savings at a faster rate than inflation devalues it.
For Stocks and Shares ISAs, the playing field is a little different. Instead of relying on interest rates to grow the value of your savings, Stocks and Shares ISAs depend on the strength of the markets, which have generally been more resilient against inflation in recent years.
For instance, the S&P 500 index of the United States’ 500 largest companies grew 23% in 2024, significantly outpacing the rate of inflation throughout the year. The ongoing AI boom on Wall Street has largely helped investors to overcome the hazards posed by inflation in recent years, but there are some warning signs to Stocks and Shares ISA investors that Wall Street doesn’t always get the better of inflation.
In 2022, when US peak inflation reached an eye-watering 9.1% in June, the S&P 500 failed to grow throughout the calendar year. In fact, £100 invested in the index in January 2022 would have returned £87.98 at the end of the year. The inflation-adjusted return for an investment in the S&P 500 for 2022 would be -12.02%.
Of course, the impressive market growth that followed in 2023 and 2024 meant that Stocks and Shares ISA holders had the last laugh, but it serves as a warning sign that investments can be heavily damaged by inflation in the short term.
What Can I Do to Protect My ISA?
Even in periods of high inflation, there are winners and losers in the stock market, and it’s important that you should open an ISA account with a reputable fund manager who has a strong record of success navigating the investment strategies of the accounts they look after.
During periods of high inflation, it’s always worth being a little more picky about who you enlist to manage your Stocks and Shares ISA and have some much-needed conversations about risk appetite with them to better align your financial goals.
One great measure to take that’s consistently helped to improve resilience in the face of high inflation periods is to add more defensive stocks to your ISA’s portfolio.
These stocks focus largely on essential services such as utilities like energy and water, or discount stores that could see higher foot traffic among budget-conscious customers.
Defensive stocks help to diversify your holdings and can foster a little more resilience within your Stocks and Shares ISA to keep it from struggling as inflation rises.
Don’t Panic
In 2022, we saw many investors lose out amid Wall Street’s mass tech stock sell-off because their tumbling performance prompted masses of cashouts that can have a long-term negative impact on your financial health.
If you’re concerned about the performance of your ISA during a period of high inflation, don’t make any rash decisions and get in touch with an expert to better understand your options and whether it’s advisable to take action.
Navigating periods of high inflation can be a big challenge for Stocks and Shares ISA holders, but as we’ve learned from the past, a strong long-term strategy and a competent fund manager can be high-quality tools to overcome periods of difficulty.
