UK inflation has hit yet another 40-year high

UK inflation is running at 9.4% – its highest for 40 years. John Stepek explains why rampant inflation can be so damaging for business, for the economy and for your finances – and what you can do to help yourself through it.

Queue in a supermarket
Prices are continuing to rise across the board.
(Image credit: © Chris Ratcliffe/Bloomberg via Getty Images)

Inflation has hit another 40-year high in the UK. You’d think we’d be getting used to it by now.

Figures for June show that the consumer price index was up 9.4% year-on-year. The retail price index excluding mortgage costs (which used to be the Bank of England target measure) was up 11.9%.

Those are high numbers. The biggest factor was surging transport costs, which in turn is mostly about fuel. But prices are still rising across the board. Looking at the services sector alone, inflation is at its highest in at least a decade, notes Bloomberg.

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Given that the rising cost of living has us all fretting about recession, this puts the Bank of England in a bit of a quandary. Raising interest rates at a time when consumer incomes are already being squeezed looks counter-intuitive.

The team at ING adds that “once the effect of April and October’s energy price increases fall out of annual comparisons next year, then headline inflation should fall back reasonably quickly.”

The Bank of England is between a rock and a hard place

However, the Bank can’t really sit on its hands and ignore near-double-digit price rises just because it hopes inflation will get back to target by the end of next year. Apart from anything else, other central banks are still raising rates which means any wavering on the Bank’s part would likely send sterling even lower (and thus exacerbate inflation).

There’s also the tricky fact that inflation makes everything much harder to predict. That’s one reason why inflation can be so damaging. Businesses and investors have been used to a world with a very long time horizon – people moaned about “secular stagnation” but didn’t entirely appreciate the predictability that went with that.

That’s not where we are anymore. Inflation shortens everyone’s time horizon. You make purchases now in case your money is worth less tomorrow. Companies keep contract terms short in case prices change drastically, and they stack up inventory for the same reason.

Workers across the board are starting to agitate for higher wages too.

Unionisation is nowhere near as high as it was in the 1970s, but you’re hearing plenty of talk of strike action already. I imagine that will only get worse as the government tries to convince public sector workers (particularly the better-paid ones) to accept below-inflation pay deals.

On the one hand, a drop or flattening in energy prices will definitely help. But on the other, the longer this goes on, the more time that inflationary forces have to become entrenched and start feeding off each other.

So while the calculus may change through the year – particularly if we get a recession – I’d still expect a rate hike in August. We might even get a full half-point rise, which would be the first such rise since the Bank was given its independence in 1997, believe it or not.

Savings rates will improve, but you’re still going to lose a fortune in real terms

What does it all mean for your money?

There’s no doubt that the interest rate on cash savings is going up. However, there’s also no doubt that it’s not going to keep up with inflation or get anywhere near it. So in real terms, your savings are being eroded at a faster rate than ever.

But you’re holding cash for a reason. You need a reliable emergency fund for if the boiler blows up. You need liquidity in case you spot a great investment opportunity. Cash is the only asset that offers these things – it’s there when you need it.

So the reality is that you just have to put up with rubbish rates. Find the best savings rate you can, but keep it flexible – no point locking in a five-year rate just now simply for the sake of an extra crumb of interest.

If you have “excess” cash, you might want to consider investing it. You might find that idea terrifying right now but at least in most cases you’re getting more for your money than you did at this time last year.

On the mortgage front, the cost of borrowing to buy a home is going to be higher too. It remains to be seen exactly how hard that hits the market – it mostly depends on where rates peak and how long they’re there for.

But in more interest-rate sensitive markets around the world, we’re already seeing house prices fall. So I wouldn’t bet on prices here continuing to surge. And if your own mortgage is coming up for renewal, I suspect it’s worth acting sooner rather than later to lock in a new deal.

Finally, if you’re in work, look at your pay. Has it risen in line with inflation or is it going to? If not, you need to think about how you’re going to tackle that. For perspective, in the private sector, the latest wage inflation data showed wages (including bonuses) going up by 7.2% in May compared to last year. Some industries have done better than others, but given how tight the labour market is, it’s not a bad time to evaluate how you’re doing.

In short, as we hinted at above, an inflationary environment means you need to be more proactive – that’s what happens when your time horizon shortens. And that’s one thing I don’t see changing for a good while yet.


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John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John 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. John joined MoneyWeek in 2005.

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.