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UK inflation at six-month high

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.


UK Inflation rose unexpectedly from 1.3% in December to 1.8% in January - the highest for six-months.

The price of gas, fuel and electricity were the main contributors to the jump in the Consumer Price Index (CPI) according to the Office for National Statistics (ONS).

The surprise increase puts the inflation rate much closer to the Bank of England’s target rate of 2% and endorses the decision made by the Bank’s Monetary Policy Committee in January to hold rates at 0.75%.

Markets were speculating a potential cut to interest rates this year based on falling inflation, but for now this gives the Bank’s new Governor Andrew Bailey - who takes over the reins from Mark Carney on 16 March - some breathing space.

Inflation - the increase in the prices of goods and services - can be both a friend and foe. It all depends on how much you have of it and whether you’re a saver or spender. A little inflation is a good thing. It’s a sign of an improving economy and it means that your debts - providing your income rises in line or above the rate of inflation - will reduce over time in real terms. Those that bought a house in the 1970s will know first-hand how the value of their mortgage debt decreased in real terms as their wages increased. Governments also welcome some inflation as they see the value of their borrowing reduce too.

Wages in the UK have also been increasing. The latest wages data released by the ONS on Tuesday showed that average weekly wages in the UK reached their highest levels since before the financial crisis, helping to ease a 12-year squeeze on cash-strapped households. News this week that the number of people in work in the UK is at its highest level since records began, could suggest further wage growth as the pool of talent looking for work becomes smaller. 

However, it’s worth noting the pace of wage growth has slowed down. According to the ONS, in the three months to December, annual growth in average weekly earnings slowed to 2.9% for total pay, which includes bonuses, down from 3.7% in the previous quarter.

It’s a different story for savers, or those on a fixed income, who experience prices rising faster than their income. If you’re in that situation, it’s worth remembering that when inflation rises, especially over the Bank of England’s preferred rate of 2%, the main tool the Bank has to dampen down inflation is to raise interest rates.

With interest rates currently at 0.75%, well below the rate of inflation, one of the biggest risks for savers is not taking enough risk, as people’s savings are unable to keep pace with the rising cost of goods and services. Those with time on their side, may want to consider venturing further up the risk scale towards the stock market.

With the average dividend yield on the FTSE 100 currently at 4.3%, many investors are increasingly looking towards riskier investments, such as stocks and shares, as an alternative to cash, in order to get a regular income.

If this higher-risk, but potentially higher-reward approach makes you feel nervous, you could consider putting your savings in the hands of the experts, by investing in a managed fund. Fidelity’s Select 50 offers a number of funds that invest in UK shares with the aim of providing an income and the potential for capital growth. These include the Franklin UK Equity Income Fund and JO Hambro UK Equity Income Fund

With the end of the tax year fast approaching it’s also worth remembering the benefits of holding your investments within a Stocks and Shares ISA, which is a tax-efficient way to save as you pay no income tax or capital gains tax on your returns. The ISA allowance for the 2019/20 tax year is £20,000 per person over 18 years and you have until midnight on 5 April 2020 to make the most of it.

More on Stocks and Shares ISAs

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy funds. Equally, if a fund you own is not on the Select 50, we're not recommending you sell it. You must ensure that any fund you choose to invest in is suitable for your own personal circumstances. Tax treatment on ISAs depends on individual circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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