How to account for rising inflation in 2022
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Inflation now stands at its highest point in 30 years – at 5.5% (in the 12 months prior to February). With the cost of living going up in multiple areas of life, many people are looking to understand why this is happening and what can be done. In this article, we show some of the main factors that are driving inflation higher in 2022 and some financial planning options you can consider. We hope you find this content helpful. If you want to discuss your own financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
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Why is inflation going up?
Inflation is generally measured in the UK using three main estimates. A popular one is the CPI (Consumer Price Index), which approaches 150 random outlets each month to collect a sample “basket” of 700 goods and services. The price movements are recorded and, together, averaged out to produce an inflation measure (shown as a percentage).
In recent years, the Bank of England (BoE) has been primarily responsible for keeping inflation under control, using interest rates to try and achieve its 2% target. However, since 2021 the cost of living has been rising – from 3.2% in August 2021, to 5.1% in October and now 5.5% at the time of writing. A big inflationary pressure has been rising global energy prices, as well as rising consumer spending following the lifting of COVID-19 lockdowns from summer 2021.
How might it affect me?
When the CPI and other inflation measures go up, this does not mean that everything will get more expensive. Certain goods and services are likely to be more affected than others (although rising energy prices do tend to affect most areas). Currently, petrol and diesel are on the rise – pushed up further by Russia’s recent invasion of Ukraine. As a major global supplier of oil and natural gas, western sanctions (and Putin’s threats to cut off Europe’s supplies) have helped push the price of Brent crude oil to over $91 per barrel (up from $70.6 a year ago).
Of course, this likely means a more expensive monthly fuel bill as you commute, do the school run and make other journeys. Moreover, Ofgem – the UK’s energy regulator – raised the energy price cap in 2021, and has said it will do so again in April 2022. This could lead to some bills going up by as much as 54% – an extra £700 per year. An estimated 22m households in the UK could be affected. The Government has said that they will provide a £150 rebate on council tax to help most households pay for this. However, this potentially still leaves households £550 out of pocket.
Rising energy prices also tend to drive up the cost of food. This is partly because supermarkets rely on HGVs to bring supplies to their shelves, and these run on fuel. If petrol/diesel goes up, then so do distribution costs – and these are usually passed on to the customer. Higher inflation can also lead to business closures and job losses. In 2021 in the north of England, for instance, two CF Industries fertiliser plants were shut down as they were no longer commercially viable.
Financial planning implications
Concerning the aforementioned, the short-term financial planning implications include revisiting your monthly budget – making sure there is a healthy gap between income and expenses, to help ensure you can cope with a rise in essential costs. It is also a good idea to check that you have a healthy emergency buffer in place (e.g. 3-6 months’ worth of living costs) to tide you over in the event of a sudden job loss or family emergency.
Longer term, however, inflation affects savings and investments. It is important to ensure that your strategy accounts for this (even if we all hope that inflation will fall back to below 2% later in 2023, or 2024). Inflation is often called the “silent killer” of savings, as it erodes the spending power of your money. If your regular savings account offers 0.50%, for instance, but inflation is 5.4%, then you make a “real terms” loss of 4.90% over 12 months – even if your bank statement says you have “earned” more money by generating interest.
Here, it is wise for most people to ensure they do not have too much saved in cash – where interest rates cannot possibly hope to keep up with inflation, right now. If you do not need the money any time soon, it may be worth speaking to a financial planner about investing it into assets which can produce a better return over the longer term. Equity funds can be a good idea for those with an investment horizon of, say, 10 years or more in front of them. However, make sure that your portfolio is properly diversified and reflects your goals and risk tolerance. Here, a financial planner can help you work through this in a prudent manner.
Conclusion & invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
