The UK headline inflation rate recorded its biggest ever jump, rising from 2% in July to a nine-year high of 3.2% in August. Earlier this summer, the Bank of England said it expected annual price increases to reach 4% before the end of the year, before dropping slightly.
What is inflation?
It is the measure of how much the prices go up and down and is tracked by several different indexes. The main one used by economists is the Consumer Price Index (CPI), which records the cost of a basket of 700 items including food, transportation, and entertainment. The Bank is responsible for keeping inflation at 2%, but it has already been higher this year and is now much higher.
Why is the August figure so high?
The rate is a year-over-year comparison, so a monthly jump in inflation doesn’t mean prices have risen that much since July. The Office for National Statistics, which publishes the figures, said rising prices for transportation, restaurants, hotels, and food and drink pushed the rate up in August.
He pointed out that in August 2020 the catering program to help was underway – as a result, restaurant prices were artificially low, so they will be much higher now in comparison, although not in historical terms. . However, staffing and supply issues in the hospitality industry have also pushed up prices, while the cost of gasoline at the pump is higher than at any time since 2013.
What does this mean to me?
Moderate inflation is not a bad thing – people will be more likely to spend their money if they think they will buy less in the future. But high inflation has consequences. Obviously, if you have a fixed salary, your money won’t go that far each month.
What if you save?
Rising inflation at a time when interest rates are at record highs is bad news – your money won’t have the same purchasing power when you take it out as when you put it away. Put simply, if you put £ 100 aside last year, it should be worth £ 103.20 to be the same value in real terms. The best one-year account currently pays 1.5%, so your savings would be worth £ 101.50.
Switching to high risk investments is one way of trying to beat inflation, but there is always the possibility that you will lose money too. “For people to have a chance to keep their real returns, there are few options other than moving up the risk curve,” says Simon Lister, independent financial advisor at the financial comparison site Investing Reviews. “For the downpours at risk, it’s a rout at the moment.”
If high inflation levels persist longer than expected, the Bank could raise interest rates, which would be good news for those with cash on deposit.
How about borrowing?
The reverse is true for borrowing. If you have a variable interest rate loan, an increase in the bank’s base rate would increase your repayments. Fortunately, many people have opted for fixed rate mortgages, and the costs will remain the same even if the bank takes action.
And inflation reduces the size of your debt in real terms. If this results in an increase in salary, then the amount you have to repay each month will be less than your income than when you first took out the loan.
What about student loans?
The interest rate on student loans is tied to inflation, so a high rate seems like bad news for many with college debt. The rate that matters is the RPI (Retail Price Index), which hit 4.8% in August, and students who started college from 2012 are expected to pay an interest rate of RPI plus 3 .
The good news for them is that the rate is calculated based on the figure for March, not September, when inflation is expected to rise further. The rate is also checked against the commercial personal loan rates and changed accordingly. It has been capped below RPI plus 3, and the government can step in if the RPI is still high.
What about the remuneration?
Most workplaces do not have to increase wages for inflation, but this is often used in negotiations. Employers, who in some industries are already grappling with staff shortages, may need to increase wages to attract and retain workers who face a higher cost of living.
What about pensions and other benefits?
A number of benefits are linked to inflation, including the state pension. The government suspended the “triple lock-in” of pensions last week, but has pledged to increase pension payments in line with the CPI if September’s figure is above 2.5%.
The September figure determines how much elements of universal credit and other benefits will increase next April, so they should keep pace with rising costs. However, before that date, the temporary universal credit increase of £ 20 per week will have ended.
Some private pensions offer payments linked to inflation, so payments should increase.