Inflation is at the core of the current financial downturn. It reached frightening levels at the end of last year. The Consumer Prices Index passed 11% in the 12 months to October.
There were several causes, not least a global economy competing for supplies and raw materials as it recovered from the Covid lockdown, made worse by the Ukraine war and its impact on the costs of energy and food staples.
But there could be some good news.
Inflation occurs when there is an increase in the prices of goods and services, it means you can buy less for £1 today than you could yesterday. In other words, inflation reduces the value of the currency over time.
Inflation is a problem for individuals because it destroys their purchasing power and eats into the value of their savings and pensions, and for business because it means higher costs and fewer customers and less to spend. For national economies it means reduced tax revenues increasing unemployment, and its natural consequence is recession.
What is the Bank of England doing about inflation?
The Bank of England is tasked by the government of keeping inflation in check, with a target inflation rate of 2%. This is a relatively painless level for inflation, and one not seen for over a year and a half.
Their main tool for controlling inflation is the interbank lending rate, usually known as the base rate. Putting the rate up means that borrowing costs more, throttling back the economy and putting the brakes on inflation.
The increase in bank rate has been painful, for borrowers of all kinds and especially for anyone with a mortgage.
The first piece of good news is that it may be starting to work.
Starting to win the battle against inflation.
Some of the global drivers behind rising prices are starting to moderate, such as high energy and food prices, where the effects of the increases may have started to work themselves though the system. We have already seen inflation falling in the US. Headline inflation there has fallen to 6.5%, from a high of 9.1% in June 2022. The same factors may be starting to filter through to the UK economy.
Aided by a mild winter, some of the key forces behind inflation in 2022, such as energy prices, are now declining.
The Bank of England has fortunately been more moderate in its rate increases than those of its transatlantic equivalent, the Federal Reserve Board, or more commonly, the Fed. We might therefore expect the rate of inflation to dip a little more slowly in the UK.
So what happens now?
Inflation over the Christmas period was still high at 10.5%, but we may already be starting to see its decline.
Headline inflation is already falling, with petrol prices falling by 8p a litre and diesel by 9p over the course of December. Food has become more expensive, but as the disruption caused by the Ukraine war is factored into prices, the hope is they may start to plateau.
Your financial plans
Core inflation is not beaten yet, and higher prices will continue to cause real problems for individuals and businesses for a few more months. The Bank of England may have at least one more interest rate hike up its sleeve, impacting mortgages and business borrowers.
The second piece of good news is that those increases may not be anything like as high as was first feared.
But inflation itself and the measures being used to control it could have an impact on your financial strategy.
If your financial plans were made at a time when interest rates were at a historic low, it is certainly time to look at them again. A fresh look at your mortgage, and at the new potential of cash savings might both be priorities.
The really good news? At Continuum we are ready to help.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, 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.
The Financial Conduct Authority does not regulate deposit accounts.
Your home may be repossessed if you do not keep up repayments on your mortgage.