Inflation is now at its highest since 1982 – is this the peak?

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.

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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.