Inflation is now at its highest since 1982 – is this the peak?
At 9%, UK inflation is at its highest for 40 years – and it’s not going anywhere soon, says John Stepek. That means you need to be much more active about how you manage your money.
UK inflation is at a 40-year high. The last time it was this high was in 1982.
The truth is that these persistent record-breaking inflation numbers have probably ceased to be hugely surprising for you.
But it doesn’t make it any easier to navigate as an investor.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
And the bad news is that even if we’re close to a peak, it’s not going to get any easier.
The inflation situation is grim
Let’s be blunt – inflation is getting really bad.
If you use the consumer prices index (CPI), prices are rising at 9% a year. If you use the “old money” retail prices index (RPI), we’re now in double-digit territory, at 11.1%. (And if you want to know the difference, here’s Merryn’s blog on the subject).
At that sort of rate, your savings are being nibbled away faster than a hapless buffalo in a pond full of piranhas, and all without the soothing David Attenborough voiceover.
This is a lot higher than the Bank of England expected a couple of months ago. It’s decidedly not transitory too.
Fuel and energy costs are the big contributors, but the price increases are spreading everywhere as anyone who’s been to the supermarket recently must have observed. As Sky’s Ed Conway puts it rather pithily: “An energy crisis is an everything crisis”.
And if you look at pipeline inflation – input costs for producers of goods, and the price of their output – both are rising at double-digit rates, and that will end up being passed on to the end-consumer. That is you and me.
Is there any good news?
The team at ING thinks that there might be. They reckon that inflation has now peaked. There might be another spike later in the year when the October energy price cap changes again (probably for the worse) but beyond that, tough comparisons with last year mean that the rate of change in prices is likely to ease.
This is an important point, by the way. If prices stayed the same from here, then in a year’s time the inflation rate would be zero. You’d still be wincing every time you paid the electricity bill, but inflation would be flat.
So inflation will struggle to keep going up at its current rate simply because certain components have shot up by so much already. As ING points out, the price of used cars went up by an average of 30% or so in the nine months to January. But prices fell by 3% last month.
That said, even ING reckons we’re looking at around 8% for the rest of the year.
So you’re still looking at either a major cost of living squeeze, or significant pressure on wages to go higher, or a bit of both.
Inflation will remain higher but central banks will struggle to get rid of it
What are the important points here?
Firstly, focusing on inflation’s “peak” risks falling into the “transitory” trap. A persistent inflation rate of closer to 4%, say, is still a big change to what we’ve been used to.
Also, you need only look at the 1970s to see that there were plenty of “lulls” in inflation within that period. That doesn’t mean everything was hunky dory during those lulls.
From that perspective, the key point to take away as an investor is that we’re not going back to the “new normal” era of the last ten years. Inflation isn’t going to dip to 8% or 7%, and suddenly it’s rate cuts and growth stocks a-go-go all over again.
The other important point is that central banks would have to act much more aggressively to “beat” inflation. It’s highly unlikely that governments have the political stomach for what that would mean (ie, recession, unemployment, and a house price crash).
Indeed the Bank of England has practically spelled this out: it knows inflation is high but it’s also worried that we’ll end up in recession (this, incidentally, is one of those rare situations where confidence in the leadership really matters, which is why Andrew Bailey’s “nothing to do with me, guv” act does not cut it right now).
I suspect that this leaves the onus on the government to “do something”. The problem here is the squeeze on consumers/voters caused by the rising cost of living, and specifically rising energy costs. The easiest way to resolve that in political terms is to subsidise energy bills in some way and to make a show of taxing the sectors closest to the problem, even though any tax hikes are unlikely to touch the sides of the money needed to alleviate the problem.
So my base case right now is that we get interest rates nudging higher, combined with the government focusing its energies on taking the edge off energy price rises. Either way, it seems unlikely that the government will just hold fire.
In terms of your own money – as I said, from an investment point of view, stick with asset allocation that assumes a more inflationary environment.
As for your savings, your mortgage, your broadband, and all those other aspects of your personal finances, it makes sense to be c. For example, if you haven’t comparison-shopped any of your insurance renewals for a while, make the effort this year.
In short, we’re in turbulent times and running on autopilot isn’t an option.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
-
Investors pull money from UK equities as government warns of “painful” Budget
The government’s post-election honeymoon period has been short-lived, and investors are shying away from UK equities as a result
By Katie Williams Published
-
Top global fintech companies to invest in
One British fintech hogs the headlines, but there are two top performers in the US. We explain where you should put your money
By David C. Stevenson Published
-
UK wages grow at a record pace
The latest UK wages data will add pressure on the BoE to push interest rates even higher.
By Nicole García Mérida Published
-
Trapped in a time of zombie government
It’s not just companies that are eking out an existence, says Max King. The state is in the twilight zone too.
By Max King Published
-
America is in deep denial over debt
The downgrade in America’s credit rating was much criticised by the US government, says Alex Rankine. But was it a long time coming?
By Alex Rankine Published
-
UK economy avoids stagnation with surprise growth
Gross domestic product increased by 0.2% in the second quarter and by 0.5% in June
By Pedro Gonçalves Published
-
Bank of England raises interest rates to 5.25%
The Bank has hiked rates from 5% to 5.25%, marking the 14th increase in a row. We explain what it means for savers and homeowners - and whether more rate rises are on the horizon
By Ruth Emery Published
-
UK wage growth hits a record high
Stubborn inflation fuels wage growth, hitting a 20-year record high. But unemployment jumps
By Vaishali Varu Published
-
UK inflation remains at 8.7% ‒ what it means for your money
Inflation was unmoved at 8.7% in the 12 months to May. What does this ‘sticky’ rate of inflation mean for your money?
By John Fitzsimons Published
-
VICE bankruptcy: how did it happen?
Was the VICE bankruptcy inevitable? We look into how the once multibillion-dollar came crashing down.
By Jane Lewis Published