Why should the price of a Freddo worry you?


Jonathan Young

Jonathan Young

Chartered Financial Planner


There’s a popular meme decrying the increase of the price of a Freddo chocolate bar on the internet. It has been shared in various formats but the main gist of all of them is: “When I was young a Freddo bar cost 10p and now it costs 30p – wish my wages increased at that rate!” *cue nostalgic irreverent laughter*.

It became so widely spread, that The Freddo Index was created and used to track against various different items and even caused Cadbury, the makers of said Freddo chocolate bar, to reduce the price.

Normally internet memes are not a great source of financial wisdom but this one holds a very real nugget of wisdom about inflation.

Most people have a working understanding of inflation and how it works and phrases such as ‘cost of living’, ‘prices index’ and other similar terms are so common that they filter into our daily lives. At its core, it really is just understanding how much more expensive things cost today compared to last month / last year / ten years ago.

The Bank of England Governor is mandated to keep inflation around 2% per annum. If they miss this target by 1% (so inflation falls below 1% or above 3%) they have to send a letter to the Chancellor of the Exchequer explaining why they have missed it, and how they foresee this changing going forward.

Inflation impact

The macro-economic impact of inflation on the wider economy would require a longer and more in-depth blog than this one about the price of a chocolate bar. However, from a personal wealth management perspective, inflation is probably the most common risk people face, and the alarming part is, most people do not realise it.

Cash is always seen as safe, and whilst there are a lot of benefits to it, it is not without risk; the problem is, you just can’t see the risk as readily.

Investments, commodities and house prices all fluctuate in value. You can check on the price of your investments or property at any point in any day, the balance in your bank account only really changes depending on how much you spend. What you are not seeing is that the ‘real value’ of that money is fluctuating in line with inflation.

Let’s look at an example to demonstrate what I am talking about. Let’s say an imaginary person, let’s call them Fred Freddoson, has the following cash assets: 

AccountValueInterest rate
Current Account£10,0000.0% p.a.
Savings Account£100,0001.2% p.a.

Now if Fred does nothing with these accounts, they will look like this over the next 1-year, 5-year and 10-year periods:

AccountValueInterest rate1 year5 year10 year
Current Account£10,0000.0% p.a.£10,000£10,000£10,000
Savings Account£100,0001.2% p.a.£101,200£106,145£112,669

Fred can always check their bank balance and see that the current account has always remained the same, whilst their savings account is accruing interest and gaining value. The problem with this is they’re not seeing the impact of inflation when they check their accounts.

If they could and we assume the Bank of England rate of 2% for inflation is achieved, they’d look like this:

AccountValueInflation adjusted rate1 year5 year10 year
Current Account£10,000-2.0% p.a. £9,800£9,039£8,170
Savings Account£100,000-0.08% p.a.£99,200£96,063£92,281

So, despite Fred looking at their bank and seeing that the balance has increased by £12,669, what they are not seeing is that inflation has actually stripped the value of their money by £9,549 as, like the Freddo chocolate bar, the cost of things has increased.

The impact on your income

Whilst the impact of inflation on cash is one part of the risk posed by inflation, the other big part from a wealth management perspective is on income needed in retirement.

Say our imaginary person Fred is 40, wants to retire at 65, and thinks they would like to retire and spend roughly £1,500 per month in retirement. The problem is, they’re thinking about what £1,500 per month would buy them now – not what £1,500 would get them in 25 years’ time.

In reality, they are not looking for an annual Net income of £18,000 (£1,500 per month) from age 65 they are looking for an annual Net income of £29,530 (£2,460 per month). Because this is the inflation adjusted income needed to maintain their lifestyle if the Bank of England meet their annualised target of 2% for the next 25 years.

Now, before you withdraw all your money from your bank account to chase returns in line with or above inflation, all the alternatives mentioned earlier (investments, property etc) contain various risks as well. For some people the inflation risk offered by cash is the right risk for them to take and the risks posed by the alternatives is not right for their circumstances, objectives or just not right for them personally.

Returns on investments are not guaranteed and you could end up impacted by negative returns AND inflation, which would lower the ‘real value’ of your money even more.

To sum up, I am trying to highlight two main things with this blog:

Inflation risk is a very real risk, even if we struggle to see it, and by trying to avoid other types of risk, you have to accept that your savings and long-term plans are still at risk of being impacted by inflation.

A Freddo when I was a kid cost 10p and now costs 30p, I wish my wages increased at the same rate!

If you would like to discuss further any of the topics raised in this blog, please contact me or your usual Johnston Carmichael Wealth Financial Planner.

Johnston Carmichael Wealth Limited is authorised and regulated by the Financial Conduct Authority.
Please note: This communication should not be read as financial advice. While all possible care is taken in the completion of this  article, no responsibility for loss occasioned by any person acting or refraining from action as a result of the information contained herein can be accepted by this firm. 
This blog represents our interpretation of current and proposed legislation and HMRC practice as at the date of publication. These may change in future.
Figures refer to the past and past performance is not a reliable indicator of future results. You may not get back the full amount of your investment.