We saved a lot of money in Ireland during the pandemic.

By the end of February, Irish households had collectively boosted deposits by €30 billion on the same month in 2020 - just before the pandemic struck - to stand at over €142 billion.

That provides a major buffer to the economy as things look increasingly precarious against the backdrop of the uncertainty brought about by the war in Ukraine.

However, in an environment where savings are already yielding little or nothing with interest rates at rock bottom, the value of that money is effectively being eroded by inflation.

So, should we just spend our savings or are there better ways of utilising the money?

An unexpected visitor

In the aftermath of the financial crash, there were years where we had little or no inflation across the euro zone.

In fact, there were periods of deflation, all of which prompted the European Central Bank to cut borrowing rates to rock bottom.

The deposit rate was brought below zero. Those measures were undertaken in an attempt to get people to spend more and kickstart borrowing in order to get a bit of inflation back into the system.

When the pandemic struck, the initial expectation was that economies would experience a contraction at least of the magnitude of the financial crisis.

That turned out not to be the case and as economies reopened, demand bounced back strongly but supply chains were not ready.

Hence, delays emerged, and the price of materials inevitably started to increase.

Inflation was back and the Russian invasion of Ukraine, together with continued Covid lockdowns in China, has seen it rise to levels not witnessed in decades.

All of which has an effect on our immediate spending practices, but also on our future plans.

"There are the short-term issues at the forecourt and the checkout, but the bigger issue is the value of money over time," Frank Conway, founder of Moneywhizz and the Irish Financial Review explains.

"Elevated inflation has a detrimental impact on the value of money," he added.

He did some calculations to demonstrate the effect.

Taking a lump sum of €50,000, an inflation rate of 7% would erode the value of it by over €3,000 in just one year taking the effective value of the cash to €46,728, he calculated.

Inflation at 7% over a decade would effectively halve the value of the lump sum compared to its value before inflation started to bite.

A muted recovery

It was hoped that the additional billions that had been put aside, simply because people weren't in a normal spending pattern during the pandemic, might be released into the economy and drive the recovery in areas that had suffered most acutely from Covid lockdowns.

However, it's now expected that these so-called 'excess savings' will have a more muted effect as spending power is effectively reduced.

"As the value of savings is eroded by inflation, households become more cautious and more of the savings are used to buffer against rising costs, rather than being used for discretionary spending," Gerard Brady, chief economist with Ibec pointed out in the group's recent economic outlook.

Savings, he said, tend to be concentrated in the upper levels of income distribution which is why there have been calls to target any fiscal supports against inflation at lower income households where 'excess' savings are likely to be lower.

But even for households with lower savings levels, the same problem exists.

These are the households that are more likely to be dependent on a fixed income and they may be trying to put money aside for education or simply building a rainy-day fund for unexpected expenses.

Not only is it more difficult to secure that money to put aside now, but the value of those savings is being eroded too.

Spend it or save it shrewdly?

So, what's the best way to avoid, or at least mitigate, the impact of inflation on our savings?

According to Frank Conway, there are two main methods.

The first is through the pension structure and the other is passive investing.

"That's a bit more alien to people. It's where you buy a diversified fund that will grow over time. An S&P 500 type fund," he explained, the S&P being the main index of top stocks in the US.

"If you look at the performance of the S&P since 1926, it's grown on average 10% a year. It could take a battering for 3 years, and that's the problem, but over the long term well managed funds do their jobs," he said.

One downside is that returns on such funds are subject to tax, but he advised that savers should maximise the taxation benefit available on pension schemes before moving to other methods of investing.

However, he warned those contributing to pension schemes to keep a close eye on the performance of their funds and to ensure that they're not being over-charged on fees.

While pension schemes can perform well in times of inflation - if stock and bond market gains generally outpace the general level of price increases - inflation can be harmful in the post-retirement period.

"It is more detrimental for the idea of retirement as it will erode ahead the value of anything you have, much the same as it does the state pension," Mr Conway pointed out.

As far as spending the money is concerned, it's a good idea to use any spare cash in an inflationary environment to pay off some more expensive forms of debt like credit cards and personal loans, especially if interest rates are about to rise.

What about active investing?

By and large, we don't tend to have a culture of investing in stocks and shares in Ireland, which is partly why our savings levels are so high.

However, there appears to be a growing acceptance among consumers that the value of their savings is being eroded anyway and that it is a good time to invest money.

According to Bank of Ireland in its latest savings index, attitudes towards investing have increased since the start of the year, despite a high degree of volatility on stock markets.

There was also a higher incidence of people actually investing, as well as a jump of the number of people who thought that the coming year would present good investment opportunities.

"I suspect that there is a growing recognition amongst some consumers that it’s no longer enough to save given near zero interest rates. Many are looking elsewhere for their longer-term plans, especially in the face of inflation concerns," Kevin Quinn, Chief Investment Strategist at Bank of Ireland explained.

Could deposits come back into vogue?

Given that the European Central Bank has been charging banks for parking excess deposits at its overnight facility for around eight years now, we're lucky not to have been hit with negative interest rates on our savings.

Other than large corporate deposits or very high net-worth savers with balances in excess of €1 million, the banks have not strayed into charging for our deposits.

But the interest rate environment could be about to change.

The US Federal Reserve and the Bank of England have both started to hike interest rates and the European Central Bank is likely to follow in the months ahead.

Having resisted the idea for a long time - sticking to the argument that inflation was 'transitory' and would pass - the sands now appear to be shifting on the idea of a rate hike at a European level.

ECB chief economist Philip Lane, a former Central Bank of Ireland Governor, appeared to confirm expectations of an imminent increase to the ECB's deposit rate, which investors now expect in July.

However, he was cautious on the notion of further hikes, citing the war in Ukraine as a risk to the outlook.

"The story is not the issue about 'are we going to move away from -0.5% for the deposit rate'," Professor Lane told Bloomberg TV.

"The big issue which we do have to still be data-dependent about is the scale and the timing of interest rate normalisation," he said.

The ECB has never said what it meant by normalisation, but policymakers expect a rate of between 1% and 1.25%, which is well below the current rate of inflation.

"It's all relative," Frank Conway explained.

"If inflation is 3% and you're getting 2% on your deposit, you're losing money."

He said we could conceivably come back into a scenario where money could become very valuable again (with high interest rates attached to deposits), but there were no signs of that right now.

So, the best bet for anyone lucky enough to have a lump sum at the moment is to consider paying down expensive debt or investing it in a pension or a diversified fund.

Once enough money has been set aside in an account that can be accessed easily in the event of an unexpected event - usually around three to six months of living expenses, Mr Conway recommends - the rest should be put to work.

With inflation likely to hit 8% in the months ahead, our cash is rapidly losing value.