Inflation

What’s in the news?

It’s a fact, UK inflation levels reached its highest level in 40 years. Even though many analysts described Inflation as transitory, we’ve been witnessing quite the opposite during the past 12 months. 

In April the year on year Consumer Price Index (CPI), which follows the aggregate change in price of a basket of goods reached 9% and the Retail Price Index (RPI) which includes the cost of mortgage payments and is influenced by changes in interest rates reached 11.1%.

To put things in perspective, The Bank of England’s target rate of inflation is CPI at 2%. We’ve been missing this target since May last year and in a recent statement, the governor Andrew Bailey, said: “there isn’t a lot we can do” to stop inflation hitting 10%, meaning we are far from seeing a decline in the cost of living any time soon.

But how did we reach this point?

We’ve been living in a low-interest-rate environment since the global financial crisis of 2007/9. Combine this with an excessive money supply, also known as ‘quantitative easing’ or ‘printing money’ (especially in recent years) and you have the first ingredient. 

Throw into the mix the rising demand for goods and services after the pandemic coupled with the supply chain issues that originated because of it and you’re getting there.

To complete the picture, we have the Russia / Ukraine war which is first and foremost a humanitarian disaster but has led to sharply rising energy prices as well as grain shortages due to Ukraine being one of the main exporters.

What does it mean for you?

At a consumer level, there are a few major impact points – Energy, Transportation, and Food. 

Chancellor of the Exchequer, Rishi Sunak has recently said: “Today’s inflation numbers are driven by the energy price cap rise in April, which in turn is driven by higher global energy prices”.

Indeed, in April we saw a 54% increase in the Ofgem’s (the energy regulator) Price Cap, which is close to £700 per year for the average household. Furthermore, an increase of around £800 is expected this October, making the total jump in the price cap between October 2021 and October 2022 a wallet-busting 117%[1]

The “Institute of Financial Studies” has reported that the increase in gas and electricity prices could lead to inflation increasing faster for the poorest households, hitting 14% in October [2]

On the other hand, supply chain issues and the Russia / Ukraine war is driving food prices to new highs. The Financial Times reported that “European leaders will intensify efforts to get food out of Ukraine by land as a Russian blockade of the country’s ports threatens tens of millions of people across the world with starvation.” 

What next?

Some of the key reasons for the current levels of Inflation, particularly the Covid related supply chain issues could hopefully be resolved in the short to medium term, but there are no guarantees of that happening. 

As an attempt to combat inflation, The Bank of England increased its base rate to 1% – it’s highest level since 2009.

Central banks around the world are employing a tighter monetary policy but need to be careful not to put an additional burden on households by excessively increasing interest rates. 

This would directly affect mortgage and loan/credit card payments. It’s worth noting that households’ current borrowing levels are near an all-time high.

An additional two measures are also coming in place:

Chancellor Rishi Sunak has recently announced a 15 billion support package for lower income house-holds. 

These will include a £650 one-off payment for families on means-tested benefits, and all households would receive an extra £200 discount on their fuel bills in October, in addition to the £200 already promised. [3] 
The package will be partially funded by a 25% Energy Windfall Tax. UK energy firms will now pay an additional 25% tax for the next 12 months. [4] 
A windfall tax is usually imposed on companies making abnormally large profits due to market circumstances they (the companies) had not themselves created.

Rishi Sunak has also announced the return of the State Pension triple lock as of next year. 

Under triple lock, the state pension is increased by the highest of earnings growth, price inflation or 2.5 per cent a year. [5] Clearly, this is good news for you if you currently receive your state pension.

Final words

The best we can do as consumers and investors is to control our spending, think clearly and look at the long-term picture. Keep a short-term cash buffer but remember that the value of these funds will be eroded by the high levels of inflation.

In order to protect your wealth from the longer-term corrosive effects, owning a well-diversified portfolio including some of the best businesses in the world is the safest bet we can make to preserve and protect our wealth. 

Should you have any questions and would like to discuss how we can help you manage your finances in uncertain and volatile times, please get in touch now.


[1]         https://ifs.org.uk/publications/16065

[2]         https://ifs.org.uk/publications/16065

[3]         https://www.theguardian.com/politics/2022/may/26/sunak-announces-windfall-tax-energy-firms

[4]         https://www.bbc.co.uk/news/business-60295177

[5]         https://www.ftadviser.com/pensions/2022/05/26/sunak-confirms-return-of-triple-lock-next-year/

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