UK inflation rates – making history?

Andrew Reynolds | 28 January 2022

UK inflation rates – making history?

“When something hasn’t happened for a while, it seems all the more potent when it eventually does occur.”

(I would normally credit the source of a quote, but given that I’ve just made it up, there isn’t any need.)

Actually, ‘made it up’ isn’t strictly true.  It happens to be a snippet from a conversation that I – and I presume most financial planners across the UK – had with a client recently.  There are two things happening just now that have not happened for quite a while, giving the headline writers and the financial press a plethora of material; the cost of living has risen substantially, and the stock market is rather ‘jumpy’ right now.

What is the CPI for 2022?

Inflation, that silent pilferer of cash savings, is at a 30 year high in the UK.  According to UK inflation rate history, CPI (Consumer Price Index) was reported at 5.4% for the 12 months to January 2022, which is the highest level since 1992.  This is causing concern for many, who are rightly planning accordingly.  Petrol prices are up, national insurance is going to rise (or is it – that policy does not seem to have many friends left in Westminster?) and those of us on a fixed price utility tariff are casting our eyes through the once-skimmed contract, trying to determine when the deal expires. 

Is inflation expected to rise in the UK?

According to the Bank of England inflation forecast, inflation will reach about 6% by spring 2022, then start to decline. Click here to read more on this.

Financial planning

But what does that mean for our longer-term financial planning?  Have these rising costs been accounted for, to ensure we still have enough money to do the things we want to do?  Simply put, inflation had to come back at some point.  Financial planners will have been warning clients regularly that this was always likely, albeit the rise seems to be sharper than most commentators were predicting. 

For those fortunate people with index-linked incomes (most final salary pension schemes, or index-linked annuities for example), it will be less of a problem; but for most of us the strategy to combat inflation will remain the returns offered by the investment market.  This is presuming of course, that you haven’t found a very generous bank willing to match the rate of inflation with a savings product.  I’ll save you the bother, there isn’t one.

“Ah, but the stock market is down just now!”, I hear you say.  And at the time of writing, that is true.  The same stocks that were worth X in September and October 2021 are now available for less.

2021 was a relatively good year for the markets all-in-all, with a 23.8% return in the MSCI World index.  Volatility levels, aside from a few spikes, have been reasonably placid, until we rolled into November.  Since then, things have been bumpier.  

But hey, this will happen.  Volatility and temporary declines are an expected and accepted part of the investment market.  It is the price we pay for the above average returns that a long-term stock market investment should provide. 

What do I do next?

So, going back to the start of the article, there is a lot of noise right now; it is natural to feel pressure to do something when the stock market has declined, to pull money out or to adjust your investments.  When we do that, we are making a paper loss a real loss; moving from the potential to the actual.  A well-diversified investment portfolio is one of the most sound, long-term methods of combating rising inflation.

For those people sitting on cash, they should check with their bank to ensure they are getting the best rate of interest available.  Sometimes these rates are to be found outside of tax-free ISAs, but each bank is different. As we are approaching the end of the tax year, people may wish to review their ISA and pension allowances, and contribute where they can afford to do so.

If you would like to discuss your situation – perhaps especially prudent if you are sitting on a lot of cash? – my colleagues and I in the Wealth department would be delighted to hear from you so please do get in touch.

Whilst discussing inflation, could I give a brief nod to this excellent thread by author Jack Monroe on Twitter.  At the time of writing, it has been read by 22 million people. 

This article is for information only and should not be seen as advice or a recommendation to act. Please note that investments can go down as well as up and you may not get back the original capital invested.


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