Understanding Inflation

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With the ongoing battle for making your pound go further, I wanted to take a look at the current causes for us all needing deeper pockets, especially over the short term. Inflation is the main driver for what is being called the “Cost of living crisis”. As financial advisers we are used to seeing ups and downs in the market and it’s probably true to say we keep a closer eye on the individual effects than most. The issues of inflation are unequally distributed, for some it will mean making tough choices about whether to put food on the table or heating their home, whereas others may be restricted on how much they can save each month.

The current situation is an amalgamation of multiple issues. War in Ukraine, Oil & Gas prices, Brexit, Border controls, post Covid logistics and supply chain backlogs, to name just a few.

So, what are the potential outcomes moving forward and what can we expect? Broadly there are 2 outcomes:

If inflation spirals, the price of goods and services increase, sometimes quite rapidly as we have experienced over recent months. In order to pay for these increased costs, we as consumers generally need to be paid more to cover the differences. The knock-on effect for businesses is when the cost of providing a product goes up because of increased wages, bills, materials etc then they have to charge more, which as you’ve probably already guessed means in return, the price of your weekly shop goes up again.

If inflation flattens off, the key thing to remember here is that falling inflation doesn’t mean things are getting cheaper, it means the costs of goods and services is getting more expensive, less quickly. Government targets are to keep inflation around 1 – 3%, this is a general standard for a successful economy and positive growth, so there is certainly a challenge to find ways of reducing inflation from it’s current figure of 7.0 % (Mar 2022 – ONS – CPI data).

A well-used method of stifling inflation is to increase interest rates. In this case it would mean the Bank of England would raise rates considerably to bring spending under control, although painful, it is a tried and tested solution and has worked well previously. Although, there are limitations on this strategies success if inflation is linked to much bigger global issues, as we are seeing currently.

Understanding Inflation

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