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.
IF you’ve noticed your household budget is looking a little stretched these days, you won’t be alone.
Prices for everyday items are on the rise and were today reflected in a big jump in the official rate of inflation. The Office for National Statistics (ONS) confirmed that the Consumer Price Index (CPI) stood 3.2% higher in August than the same month a year ago. It’s up from just 2% in July - the biggest rise in the measure since it was introduced in 1997.
At 3.2%, inflation is elevated but not extreme by historical standards. CPI was running at 3.1% as recently as 2017 and hit 5.2% in 2011. But that doesn’t tell the whole story. This has not been a gradual rise in inflation, but a sudden one. CPI was barely moving a year ago, rising by just 0.2% in August 2020, with almost all of the rise to today’s level coming since the turn of the year.
And underneath that headline rate there are items rising in price much more quickly. Petrol, for example, has leapt from an average 113.1p a litre in August last year to 134.6p this year. That’s a 19% rise. Wholesale energy prices are rising too and are sure to translate into higher gas and electricity bills as the weather turns and energy use rises. These price rises will feel especially painful for households as they are costs which can’t easily be avoided and are items that we pay particular attention to because we can regularly compare what we’re paying.
What’s more, higher inflation is arriving as economic growth is slowing - UK GDP rose by just 0.1% in July. That raises the spectre of ‘stagflation’ - a nasty mix of slow growth and rising prices.
There are differing views on what happens next. The ONS was quick to point out that much of the spike in inflation in August is temporary, reflecting one-off effects such as the end of ‘Eat-Out-To-Help-Out’ discounts that meant restaurant and hospitality prices jumped. Growth, too, is forecast to recover somewhat from the slowdown in July so stagflation fears may ease in the months ahead.
A more gloomy view, however, is that there are pressures in the economy that cannot be so easily unwound. Prices for raw materials are rising and those extra costs are likely to be passed on to end customers. Labour, too, is costing more as businesses struggle to fill vacancies and are forced to raise wages to attract the staff they need. That creates extra demand in the economy - another inflationary pressure.
With inflation now outside the Bank of England’s target range, rate-setters will be under pressure to act. The next few months will be a fine balancing act and monetary stimulus and the emergency measures that were introduced in response to the pandemic may need to be withdrawn, potentially leading to some volatility in markets.
It has the makings of a difficult winter for households, as well as those in charge of the economy.
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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