UK Inflation: This Time It's Different
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Much like the rest of the world, UK inflation has risen again and is now tracking 9.4% in the three months to June - the highest rate since 1982. While it may comfort the UK to not be alone in this situation, this doesn’t make it any easier for the average consumer who is facing levels of inflation that haven’t been seen for over 30 years.
The big difference here, though, is that back in 1982 when inflation averaged 8.6% over the year, the average interest rate was 11%. In the UK today the Bank of England base interest rate is just 1.25%. This means that average savers and low-risk investors have nowhere to go to preserve the value of their money.
While the examples that the ONS give to demonstrate inflation seem manageable, with a loaf of bread that cost £1 last year now costing £1.94, the reality for people's savings is really quite stark. For example, savings of £10,000 this time last year, are now worth £9,060, while savings of £100,000 - thinking more of pension savers - are now worth £90,060. And so, when we start to look at the longer-term picture for wealth, things are very stark indeed. And this, of course, is if the UK inflation figures are fully accurate. At Truflation, our blockchain-based index - which tracks the rising cost of goods and services in real-time - is showing that US inflation is currently around 2% higher than official figures suggest. We’ll be launching our UK index this month when we should get a much clearer picture of what the UK inflation rate truly is.Already, Bank of England (BoE) governor Andrew Bailey has warned of what he believes to be an “apocalyptic“ rise in global food prices to come, yet the BoE says it won’t last. Indeed it predicts that inflation will peak in the winter before coming down to around 2% in the next two years. This smacks of wishful thinking at best, PR at worst. As many economists have observed, historically when inflation has risen over 9% it has taken years rather than months to come back down. And today, we find ourselves in a situation unlike any we’ve seen before. Central banks have very few if no levers to pull with monetary easing having been a strong contributing factor to the current situation. Instead, it is down to the finance sector, especially the most innovative corners of the finance sector, to come up with new solutions to help people preserve their wealth in this current environment.
Cuts
Causes are well known: rising fuel and food prices driven by the Ukraine conflict and strong demand and short supply post-Covid. However, the release shows that truly every sector of the economy is being affected with very few showing a downward trend. Whether or not a higher interest rate could curb inflation is of course questionable given the current drivers, namely a foreign conflict as well as a reluctance amongst energy companies to pump more so as to keep prices high. However, something must be done to try to tackle what is turning into a crisis as we head into what could be a very big global recession.
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