Inflation is back in the headlines in Europe, although it could perhaps be argued that it never really left them.
Euro area inflation increased from 2.9% in July to 3.2% in August. The latest flash estimate from Eurostat, published on 2 October, suggests it rose again to 3.8% in September. Energy is the main driver, with energy prices estimated to have increased by 18.8% year-on-year in September.
This has also affected interest rates. On 10 September, the European Central Bank raised its three key rates by another 0.25 percentage points, taking the deposit facility rate to 2.50%, the main refinancing rate to 2.65% and the marginal lending facility rate to 2.90%. The ECB currently expects headline inflation to average 3.0% across 2026 and remain above its 2% target for some time. It is worth noting that central banks around the world, in the US, Japan, and Australia, amongst other places increased interest rates to combat rising inflation.
For international professionals living in Europe, the question is what, if anything, should you do about it?
As is often the case in financial planning, the answer is probably less dramatic than the headlines suggest.
First, review what inflation actually means for your spending
An inflation rate of 3.8% does not mean everybody's personal cost of living has increased by exactly 3.8%.
Inflation measures changes across a broad basket of goods and services. Your own experience will depend on where you live and where your money goes.
For example, energy has been the main source of the latest increase. If your household has high energy costs, drives regularly or has seen utility contracts renewed at higher prices, you may feel the impact more significantly. Someone whose largest costs are fixed for the next year may feel much less of it.
For expats there can be another layer. You may have financial commitments in more than one country or currency: school fees, property costs, family support, mortgage payments or regular trips home.
The first practical step is therefore not to react to the headline inflation number. Look at your own cash flow.
Have your monthly living costs materially increased? Is the amount you are saving each month falling? Have costs you previously considered temporary now become normal?
A financial plan needs to reflect the life you are actually living rather than the budget you set two years ago.
Check your cash reserve, but do not obsess about the return
We advocate keeping an appropriate cash reserve for unexpected expenditure and short-term needs.
For an international professional this can be particularly important. A job change or unexpected move between countries can create significant costs very quickly. As we have discussed previously, three to six months of expenditure can be a useful reference point, although the appropriate amount can be considerably higher or lower depending on your individual circumstances.
Inflation does not make the purpose of this reserve less important.
However, it does make holding excessive amounts of cash more expensive in real terms.
If your bank pays 2% and inflation is running at 3.8%, the purchasing power of that money is reducing before taking taxation into account. This does not mean your emergency reserve should suddenly be invested. The purpose of emergency cash is accessibility and security, not maximising growth.
The more useful question is whether you are holding significantly more cash than you realistically need for those short-term objectives.
Remember the difference between your return and your real return
Inflation is also a useful reminder that the number shown on an investment statement is not the whole story.
If an investment grows by 5% while prices rise by 3.8%, the increase in your real purchasing power is considerably smaller than 5%.
This applies to cash too.
People can understandably feel reassured when a savings account is paying a respectable interest rate after many years when rates were close to zero. But a positive nominal return is not necessarily a positive real return.
Over long periods, this distinction becomes particularly important. Retirement planning is ultimately about what your accumulated wealth will allow you to buy in the future, not simply the number displayed on an account.
Do not redesign your portfolio around one inflation announcement
This is perhaps the most important point.
The latest inflation figures matter. The ECB's response matters. Energy prices, geopolitical events and economic growth all matter.
But none of them, individually, should replace your financial plan.
There is an endless supply of news telling investors what they should buy now because inflation is rising, interest rates have changed, oil has moved, technology shares have rallied or markets are apparently about to do something dramatic.
We recently wrote that asking ‘where should I invest now?’ can itself be the wrong question. Investment decisions should instead begin with your objectives, timeframe, capacity for loss and wider financial position.
A diversified investment portfolio is built with the expectation that economic conditions will change.
Inflation will rise and fall. Interest rates will rise and fall. Different assets and regions will perform differently at different times. Constantly restructuring a long-term portfolio in response to the latest economic release risks turning investment into speculation.
That does not mean portfolios should never change. It means changes should have a reason that relates to you.
Higher interest rates are worth reviewing as well
The ECB's September increase will affect people differently.
For savers it may support higher deposit rates, although banks do not necessarily pass central bank increases on in full.
For borrowers the effect can be less welcome. Variable-rate debt can become more expensive relatively quickly, while fixed mortgage pricing reflects a wider range of market expectations and funding costs rather than simply tracking the ECB rate directly.
If you have significant debt, a mortgage approaching renewal, or large cash holdings, this is therefore a sensible time to review the position.
Again, review does not automatically mean change.
We wrote in July about the impact of higher eurozone rates on cash, mortgages, debt and investment planning. The further September rate increase reinforces the same principle: understand how changes affect your own financial plan rather than trying to predict exactly what the ECB will do next.
Focus on the things you can control
Inflation is currently higher than the ECB would like, and there remains considerable uncertainty around energy prices, geopolitical events and the wider economy. The ECB itself has said that it will continue to make decisions meeting by meeting rather than committing to a predetermined interest-rate path.
You cannot control any of that.
You can control whether your spending is sustainable, whether you have sufficient emergency cash, whether expensive debt is being managed, whether your investments remain diversified and whether your financial plan still reflects your objectives.
Those are less exciting subjects than predicting the next inflation number.
They are also considerably more useful.
If you are an international professional living in Europe and would like to review how inflation, interest rates and changing living costs affect your financial plan, speak with us at Arisaig Wealth Management. We can help you assess your cash reserves, investments and longer-term objectives as part of a comprehensive financial plan.
This article provides general information only and does not constitute personal financial or investment advice. Investments can rise and fall in value, and the appropriate approach will depend on your individual circumstances, objectives and attitude to risk.
