Rising Inflation

Inflation affects everyone in the world, even if they don’t know it. But firstly what is Inflation? Simply put Inflation is a measure of the price rises in goods and services that people need and use in their everyday lives.

In mid of February 2022, Inflation rates in the UK rose to 5.5% and in the USA they reached 7.5%

So, what is causing this madness for a sudden hike in prices?

Firstly, we have seen a reduction in the labour force in the UK versus pre-pandemic of about half a million people (~1.5% of the Labour force), a large number of these workers have been older employees due either to positions that existed before the pandemic that have now been removed by employers or older workers deciding to retire early and leave the workforce, now one can argue this has had a positive impact as having fewer people and more jobs available has pushed up wages for the remainder –increasing disposable income so people can spend more and to a large extent this is true, but conversely it places pressure on goods and service suppliers to raise their costs, especially amongst food manufacturers operating on fine margins that need to recover the increase in wage costs by raising food and other goods to compensate for the increase in wages – they can absorb some costs but when these become too great (especially on tight margin items) retailers and manufacturers then pass these costs onto consumers and prices rise -this is what we are now starting to see on some goods in supermarkets. Fortunately, at the time of writing, I have noticed that staples like bread, milk, eggs & cheese have not risen sharply.

Secondly, Energy prices (Gas, Electric & Petrol/Diesel) have all risen rapidly and the reason for this is because at the outset of the pandemic there was a large ‘switching off’ in demand for energy by businesses due to lockdown; people were restricted in their movements, not going to work, staying at home, so many businesses reduced their demand for energy.

As we have started to come out of the pandemic and lockdowns are removed demand for energy by businesses has picked up, but supply has not kept up with demand, so we have a mismatch with more demand than producers can supply which drives a rise in energy prices. Alongside this, the recent crisis in Ukraine has placed additional pressure on gas and oil prices. Russia is a major supplier of Gas to Europe –the Nord Stream 2 Gas pipeline supplies 40% of all of Germany's natural gas, although we in Britain import ~2-3% of our gas from Russia, most of our diesel, gas prices are determined like all commodities by global markets trading.

Thirdly, For those in employment National Insurance costs will rise by 1.25% in April 2022 to pay for the NHS and social care, tax rates will not change for 2022 but the tax brackets (thresholds at which people pay tax) have been adjusted to take into account the increase in inflation. The dividend tax rate will also increase by 1.25%. These will have an effect on disposable incomes.

What You Can Do?

Chancellor Rishi Sunak has announced a temporary cut in council tax for properties in Bands A to D to alleviate the strain on soaring Energy costs, this is designed to help 8 in 10 homes and excludes the wealthiest and will be applied automatically if you pay by direct debit. He has already put in place measures to help those on the national living wage (~30% of all employees are on the National Living Wage).

The markets are expecting further interest rate rises throughout the year, with interest rates predicted to be 2% by the end of the year.

I think Energy costs will rise and then remain at that level for the rest of the year. There are now more unknowns –how long the conflict in Ukraine will last, people.s work & buying habits have changed since the pandemic, companies are nervous about investing when commodities are at high prices fast and so redundancies may increase. Energy supplies are being switched away from Russia to the Middle East but this will take many months to feed into the economy, an equilibrium in vacancies and the available workforce reached which will ease wage pressures, but rising prices for Food & Energy could go on for some time well into 2023 so it’s Vital to have a plan and be prepared for a possible worst case scenario.

What I recommend is for everyone who feels they may be at risk of rising prices, to put together a monthly budget showing your outgoings on food, petrol, Energy bills, and Other costs (Vehicle, Road tax, Insurance, Broadband, etc.) then to translate this into a 1 month, 3 months and 6 months forecast of your costs against income.

If you then notice the two: Income versus the money going out do not match then start to look at ways in how you can identify & eliminate any ‘unnecessary spends’ or look at reducing costs in other ways, this also provides a great opportunity to streamline your life, you could also look at ways you can generate income by selling items online, that you no longer need and hence help make ends meet.

Even reducing spending by relatively small amounts can have a big impact; for example, a saving of £5 per week equates to saving £260 per year, quite often that could mean walking a short distance to the shops once or twice a week rather than taking the car which could easily save this amount in petrol/diesel, and it's healthier for you! Also whilst at the supermarket have a look in the reduced food item section –you’ll often find something interesting and at a great price!

I would also strongly recommend reducing outstanding medium & long-term debts to curb inflation the Bank of England will almost certainly raise interest rates in the short term, also putting aside regular amounts for an ‘Emergency’ or ‘Rainy Day’ fund, it just helps build a ‘financial cushion’.

Finally remember whatever your situation, if you do find yourself in difficulty and need help, it’s really important to talk to someone about the situation. The Citizens Advice Bureau offers a free, independent counseling service that deals with financial and personal matters, and is always there to help.

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Copyright Suresh Thadani

An Independent Financial Advisor.

 See more with @SureshThadaniFinancialAcademy