Nowhere to run, nowhere to hide.. from the inflation monster

Written by Rebecca O'Connor on 17th January 2017

New inflation figures were published yesterday and – brace yourselves – prices are rising pretty quickly – by 1.6 per cent on the annual headline measure of inflation, called the Consumer Price Index, in December, up from 1.2 per cent in November.

What this means for you is everything you normally buy is a little more expensive than it was this time last year – 1.6 per cent more expensive to be exact. And yes, this does have a fair amount to do with Brexit, since you were wondering, like most slightly troubling economic data for probably about, ooh, the next 10 years.

But 1.6 per cent doesn’t sound like a lot?

Well, it’s certainly not rampant, we’re not talking the hyperinflation of Germany in the early 20th century, when people wheeled wheelbarrows full of notes down the street to buy a loaf of bread. But it is a hefty 0.4 percentage point rise on last month and approaching the 2% mark, which is when (I imagine) a bell rings, all economists start to panic and run around a bit and the Governor of the Bank of England starts to think about the letter he has to write to the Chancellor when inflation strays beyond the 2 per cent target by 1 per cent, either way, to explain why the Bank is failing to keep inflation in check.

Because the Bank, you see, can increase interest rates. If interest rates rise, this tends to keep a lid on inflation, which some people think could go as high as 5 per cent this year, thanks to Brexit and more expensive imports, including fuel.

So another reason to worry about higher inflation, if you are a homeowner with a variable rate mortgage anyway, is that it could result in your mortgage repayments rising when interest rates do eventually rise, which most people believe is likely to be sooner rather than later this year.

Why is inflation so bad?

Prices rising too quickly affects the cost of living directly, making it immediately more difficult for people to afford their essentials and putting debt repayments at risk, that kind of thing. It also, therefore, affects consumer confidence.

But what really matters, when determining how likely inflation is to affect people, is – is wage growth rising faster? If wage growth is much higher, we don’t all have to worry quite so much. The forecast for wage growth in the UK in 2017 is 2.9 per cent, according to ECA International, which gives a buffer, but not a huge one if inflation does end up running way over it’s 2% target this year.

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Inflation levels are usually different for different people, depending on what you buy, because it measures the price of a basket of goods that is meant to be representative of the population, but of course, we don’t all spend money on the same things.

Sometimes the effects hit younger people harder, sometimes older.

Today’s inflation is affecting everyone almost equally (although the younger generations are still hit slightly harder – see the tables from Aviva, below). This is because inflation now is being driven in particular by food and fuel prices. When the prices of things like education and housing are rising fastest, this tends to affect the young more. But everyone buys food, and most adults own a car.

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Alistair McQueen, head of savings and retirement at Aviva, said: “Beneath today’s headline consumer price inflation1 (CPI) figure of 1.6%, Aviva’s analysis shows inflation is back for all ages.

“Twelve months ago, in December 2015, the under-30s were experiencing price inflation more than three times that of any other age group in society – driven by greater spending on education and rising housing costs.

Aviva Age Inflation Index2
Under 30s 30-49 50-64 65-74 75+ Headline CPI
CPI Dec 2015 0.59 0.15 0.17 0.04 -0.03 0.20

“Today’s picture is very different. The price pressure on younger generations is still greater, but the gap is closing fast – there is now little difference in the price inflation experienced by each age group. Recent rises in transport costs and food prices have placed particular upward pressure on other age groups, especially the over-50s.

Aviva Age Inflation Index2
Under 30s 30-49 50-64 65-74 75+ Headline CPI
CPI Dec 2016 1.76 1.58 1.67 1.54 1.27 1.60

“Price inflation is back for all ages. In the last few months, it has been a forgotten phenomenon for older consumers, however, people of all ages will have to get used to rising prices once again. Balancing budgets, managing money and saving smarter will help consumers navigate these different times.”

What can you do to hide from the inflation monster?

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First, don’t be too worried about it. We’ll cope. Then:

  • Move any savings you have in low-interest cash accounts somewhere with a higher rate of interest or maybe even the stock market. More than 60% of Brits JUST save in cash. That’s a very high proportion of people currently earning less than the rate of inflation on their savings, meaning they are effectively paying the bank to keep their money for them.
  • Drive less. It’s obvious stuff really – if fuel prices are rising, try to use less of it. Trips on the bus or on the train may now prove more cost effective.
  • With your weekly food shop, stick with the offers and try to avoid imported foods. Go Best of British for basics, meat and vegetables. As a result of Brexit, imports are more expensive, which includes all those lovely French cheeses, wines and, well, pretty much all the food we really enjoy. The pattern of rising prices for imports and steadier prices for home-produced goods is not set to change imminently (certainly not now we’ve just opted for a hard Brexit.)
  • Fix your mortgage. If you are on a variable rate, a decent long term fix might be calling your name, as interest rates are undoubtedly set to rise.
  • Holiday in the UK.
  • Make sure you are on one of the cheaper energy tariffs.