The Impact of Rising Inflation

Nobody likes paying more for things, but inflation may be a particular problem in 2022. Here’s what it could mean for your finances. Inflation measurement Inflation is measured in the UK mainly through the Consumer Price Index, which tracks prices across a range of goods and services. It doesn’t include council tax or mortgage payments, and it doesn’t treat short-term sale prices returning to normal as a price increase. While most economists consider some inflation inevitable, governments generally try to keep inflation below 2% a year. The theory is that this reduces the risk of a vicious cycle where the cost of living goes up, staff demand (and get) higher wages to compensate, manufacturers increase prices to reflect the staffing costs, and retailers raise prices knowing people are earning more. Inflation went over this target several times in 2021 and the Bank of England has forecast it could regularly hit 4% or higher in 2022. Why is it increasing? It’s partly because some of the suspected causes of recent price rises may be here for some time. This includes: higher oil and gas prices (driven by worldwide demand) that affect manufacturing; a shortage of staff in lorry driving and hospitality pushing up wages; and supply-chain problems such as global shipping slowdowns and silicon chip shortages. The fact that it’s manufacturing costs rather than consumer demand for specific products, may affect the way shoppers experience this inflation. It’s likely they’ll find everything seems a little pricier, rather than particular items suddenly feeling shockingly expensive. That could mean the squeeze of incomes – especially with National Insurance rising in April - is a little tighter. Not just spenders Savers and investors may also notice the difference. In simple terms, the higher inflation is, the less benefit people get from a particular fixed interest rate on savings. A 4% inflation rate exceeds all but the most attractive savings rates on offer, meaning savers lose buying power over time. (Though savers are still better off than those not making any interest.) That could incentivise some people with spare cash to move to riskier investments in the hope of a better return. Effect on pensions Rising inflation has consequences for pensioners, beyond increasing prices. The ‘triple lock’ means the state pension rises each year by whichever is higher: rises in average earnings, inflation from the Consumer Price Index, or 2.5 percent. The government has already made an exception to the triple lock, temporarily ignoring a ‘freak’ rise in earnings caused by the move for many from furlough payments back to normal wages. A prolonged spell of inflation above 2.5 percent could mean bigger pension rises. Effect on mortgages Perhaps the biggest concern for many consumers is how inflation could affect their mortgages. Until the financial crisis of 2008, central banks and