Is there any reason to worry about Inflation?
If you’re the sort of person who likes their glass half-empty then there will be plenty of opportunities to find something to worry about at the moment. The recovery from the pandemic, global tensions and all the staff shortages in the news can turn anyone into a pessimist.
On top of that, some are suggesting that we need to start worrying about a word that has hardly been on anyone’s lips for the last few years – inflation. There are even fears that the policymakers could “choke off” the economic recovery because of worries about inflation.
In the recent past, most economies have been worrying not about inflation, but about deflation – which can cause economies to stagnate. Seemingly suddenly, the effects of Covid are causing prices to rise, and we’re hearing more and more about supply chain inflation. Simply put, manufacturers are having to pay more for raw materials because of delays and disruption caused by the pandemic. That cost carries down the line, and inevitably, this will result in higher prices to consumers.
The Bank of England’s departing chief economist Andy Haldane has warned that inflation is “rising fast” and could reach nearly 4% this year – well above the Bank’s target rate of 2% (which was exceeded in May, when inflation reached 2.1%).
The Bank’s Monetary Policy Committee is slightly less hawkish, saying that it expects inflation to go above 3% “for a temporary period.” The Resolution Foundation, a well-known think tank, sides with Mr Haldane, arguing that as the economy opens up and consumers start to spend the savings they accumulated during lockdown inflation will be driven up.
Concerns are also being voiced in Europe – which has suffered from too little inflation for almost the last decade – and in the US, with the Wall Street Journal forcibly making the point that it is supply problems causing the rise in prices, not an increase in consumer demand.
Whoever is right, inflation is something worth keeping an eye on. Inflation has the potential to impact the value of savings and investments, and interest rates paid on deposit accounts remain at, or very close to, historic lows. If inflation does reach 4% then a deposit account paying less than 1% is going to look remarkably unattractive.
It’s not all doom and gloom, as with most things, a little planning goes a long way. Regular contact with your financial professionals and regular reviews of portfolios is as important as ever. We will be keeping a close eye on the inflation figures over the coming months and will make sure that our clients are kept fully updated – and, of course, that any necessary action is taken at the appropriate time.