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. 

Inflation is on the rise. The latest data released today shows that annual UK inflation more than doubled in April. A rise in energy and clothing costs saw inflation jump from 0.7% in March to 1.5% a month later. 

That means that consumer prices are rising at the fastest rate since the very start of the pandemic. So where does this leave us? Well, the prices that are rising are largely on essential items - things like clothes, petrol and energy that are not just ‘nice to haves’. Oil prices have already risen on the expectation that global recovery is underway, or at least on the way. So that means consumers’ hands are tied and we have little alternative but to pay the price asked.  

Does this mean that we are automatically headed into an even higher inflationary scenario? 

No, it does not. It is important to point out that this shift upwards looks all the more dramatic because we had falling prices at the start of the pandemic and have since seen a general trend upwards in prices. Taking petrol as one example; fuel at the pump is now at its highest price since January 2020. 

Yes, the Bank of England has long made clear that 2% is its target, when it comes to inflation. But while it may feel we’ve added another ‘worry’ to the pot, there is no real need to worry about inflation right now. Not least because the Bank of England has said quite plainly that it is not going to be “pulling the trigger” on interest rates as soon as inflation goes above this 2% target. 

The message throughout the pandemic has been the need to kick-start the economy and get business booming again, so one month of uptick is no cause for concern. This has all been factored in. Only two weeks ago, the Bank of England said UK inflation was heading towards 2% and expected to hit 2.5% by the end of the year.  It then thinks inflation will fall back to 2% in 2022 and 2023. 

The reason it has all been factored is that lockdown is automatically deflationary. It couldn’t be anything else. When what you can spend on is limited, then consumer spending inevitably falls. If retailers, for example, are to stand any chance of selling goods people don’t really want or need, then they have to cut prices to enticing levels to get people to put their hands in their pockets. 

And the opposite is, of course, true.  As long as shoppers, tourists and revellers come back out to play, which they inevitably will, any consumer spending will prompt inflation to show a rise.  So a switch from 0.7% to 1.5% does not take much real price inflation; in reality more just an acknowledgement of the fact that prices are no longer falling.

And you only have to take a look at the amounts amassed in surprise ‘lockdown savings’ to see just how much of an uphill struggle it has been for any business attempting to get consumers’ spending. With ‘real life’ having ground to a halt for great chunks of the past year, it’s little surprise that millions of people who have been able to continue working have saved significant sums of money since the start of the pandemic. 

Having these lockdowns savings is obviously one immensely positive silver lining from the pandemic. What you now do with these savings can ensure the ‘legacy’ of the past 14 months is a more positive future.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. 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 a Fidelity adviser or an authorised financial adviser of your choice

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