Inflation nation Prices are rising rapidly and money in the bank will lose its value unless you take steps to protect it, writes Andrew Strange
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rices are rising at the fastest rate in a quarter of a century as businesses pass on the costs of energy, labour, materials and shipping to consumers. Inflation reached 3.2% in August, and the Bank of England has warned that it may rise above 4% this winter, with persistent pressure on living costs likely to last until at least the middle of next year. Simply put, inflation is the rate at which prices are rising – if the cost of a £1 jar of honey rises by 5p, then honey inflation is 5%. Current levels are a long way from the double-digit inflation that blighted the 1970s but, over time, price rises can have a big impact on how much you can buy with your money. The current inflation rate is far above the Bank of England’s 2% target and is particularly bad news for bank deposits. Many people built up large cash surpluses during lockdown but with interest rates at historically low levels, the value of cash in the bank is likely to be eroded. Families may need to make plans to protect their savings. Portfolio Manager Eleanor Ingilby explains: “Current interest rates are at an all-time low, standing at 0% and even in some cases creeping into negative interest rates. And, conversely, inflation is at a 10-year high. We have had a very unusual year and, until recently, it has provided quite limited opportunities to spend money. “That means that many of us have built up quite large cash reserves. Now the risk is that holding that excess cash in the bank could lead to that capital eroding. You should always keep some
“Holding that extra cash in the bank could lead to that capital eroding” 6
cash to hand in case you need it for emergencies or a rainy day, but it’s important to sit down and work out how much cash you actually need and make sure the rest of that money works hard for you.” Inflationary pressures Inflation has been affected by global developments, particularly the economic recovery from the pandemic and supply constraints in some sectors. Energy prices have risen since April as previous increases in wholesale electricity and gas prices have been passed on to households. But the Consumer Price Index shows that rising prices are widespread, affecting everything from petrol, clothing and footwear to catering services, which saw inflation rise to 7.9% in August, its highest on record. Global supply bottlenecks have also led to shortages of some goods, such as semiconductors, which have affected UK goods prices indirectly. For example, semiconductor shortages have disrupted new car production, which has led to an increase in demand in the used car market. Twelve-month used car inflation rose to 18.3% in August. The jump in inflation in August was the highest on record. But inflation data is measured against the same period in the previous year and recent data has reflected the change in prices relative to spring and summer 2020. For example, the rise in hospitality sector inflation in part reflected the impact of the Eat Out to Help Out scheme and the temporarily reduced VAT rate for hospitality. This has led some people to suggest that high inflation is transitory, but others believe that strong inflationary pressures remain, with the Bank of America’s CEO Brian Moynihan saying: “Inflation is clearly not temporary.” Sanlam Chief Investment Officer Phil Smeaton explains: “We have generally rising prices in the economy because we have inflated the money supply over the past 18 months which is enabling excess demand that the world’s productive capacity cannot meet. The inflation from printing money and government deficit spending
Wealthsmiths Winter 2021
