Are we at peak inflation?

UK inflation is already at its highest for 40 years. Prices are rising by 9.4% a year as the prices of fuel, energy and food put pressure on businesses, on household budgets, and make long term financial planning more important – and more challenging – than ever.

At Continuum we are looking at inflation – and asking if we are at peak inflation, or whether there is there is worse to come.

How is inflation measured?

Inflation is a measure of the rate at which a range of prices are rising over a given time. For example, if a loaf of bread costs £1 one year and £1.09 the next year, there is an annual inflation rate of 9%.

In practice, the prices of a whole range of items are tracked to get an accurate picture of inflation. In the UK, this is worked out by the Office for National Statistics (ONS), which notes the prices of hundreds of everyday items,  from a list which reflect real people’s spending.

This is constantly updated. This year, items such as tinned beans and sports bras were added, reflecting a rising interest in plant-based diets and exercise.

The ONS releases its inflation figures each month, showing how much these prices have risen since the same date last year. This is known as the Consumer Prices Index (CPI).

They found that inflation rose by 9.4% in the 12 months to June, up from 9.1% in May.

This is serious. The money in your pocket, and even more important in your bank and your savings is falling in value every day, and if this keeps up, it will have fallen in value by close to 10% in just over a year’s time.

Why is inflation so high?

There is no agreement by economists as to the exact cause of the inflation surge, but several factors may be in play. Most attribute it to product shortages resulting from global supply-chain problems, largely caused by the COVID-19 pandemic. Others suggest strong consumer demand driven by robust job prospects.

But if the surge in demand after the covid crisis may have been a trigger, but things have been made worse by the Ukraine war.

This has had a direct effect on energy. Energy bills are one of the biggest contributors to inflation at present, as wholesale oil and gas prices reflect the global disruption to supplies. This wholesale price increase is being passed on to consumers. After a rise in the UK’s energy price cap in April, average gas and electricity prices jumped by 53.5% and 95.5% respectively compared with a year ago.

Food prices are also surging as the war in Ukraine squeezes global grain production. 

Will it get worse?

No one knows what the future holds, but the potential for inflation to get worse exists.

One food industry boss has warned that food prices could rise by up to 15% this year, while the Bank of England has warned that UK inflation could reach 11% by autumn 2022, largely as a result of rising global energy prices.

The Bank of England traditional response to rising inflation is to raise interest rates. The thinking is that whenborrowing is more expensive, people have less money to spend, meaning that they will buy less, in turn meaning that prices will stop rising.

But when inflation is caused by external forces, such as rising global energy prices, UK interest rate rises  might not have much impact.

What can you do?

There is of course nothing that you can do about rising prices, other than not pay them.

Tightening your belt can help deal with short term issues, but what about the longer-term erosion of your wealth caused by inflation?

It means you may need to reassess your financial targets. You may need a more substantial pension pot to fund the kind of retirement you want. You may need to look at whether having savings is a good idea – or whether it is time to look at the world of investing.

And if you are already an investor, you need to look closely at your portfolio, to ensure that your wealth creation goals are still in reach.

Fortunately, there is a simple way to get expert help with all those needs. Call us at Continuum. We can help you look at all your current financial arrangements, and help you make any changes you need to get your plans back on track – whatever inflation has in store.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice, you should seek independent financial advice before embarking on any course of action.

The value of investments can fall as well as rise and you may get back less than you invested.

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