Should I be concerned about inflation rising?

In this bitesize episode, Craig Skelton, Principle of CS Mortgage Solutions discusses the concerns surrounding the rise in inflation since the easing of lockdown and the effect this might have on the financial market and economy.

Should I be concerned about inflation rising? 

Most economists expect inflation to pick up over the next few months, as lockdown restrictions ease and shops and restaurants reopen. Financial markets are making their adjustments in anticipation of a rise in inflation, with bond yields picking up meaning the prices have fallen, and stock markets are rotating from defensive sectors into cyclicals.

What is inflation? 

Inflation measures the change in the price of goods and services, if inflation rises, then it takes more of your money to buy things. We all experience inflation in our daily lives, from refueling our cars, to buying groceries or using public transport. 

In the UK, the official measure of inflation is the Consumer Prices Index, which is published by the Office for National Statistics (ONS). This monitors what people are spending their money on using a basket of everyday goods and services. The ONS adjust the basket from time to time, to affect our change in spending habits.

During lockdown, there was a shift, with products like hand sanitizers and hand wipes being added and items like white chocolate and ground coffee dropping off the list. It’s easy to ignore the impact of inflation on your finances. Most people’s spending habits this month, compared with the same time a year ago, will probably stick to the same patterns regardless of inflation at the time. This is because the differences seem small, and therefore, wouldn’t affect the way that people spend. 

It’s a different matter, however, if you’re trying to save money. With interest rates currently lower than the rate of inflation, the real value of any cash savings is falling. In other words, the cost of living is increasing at a faster rate than your savings are growing, which means the spending power of your money is actually falling. 

How will inflation affect investments? 

Many people in the UK have now begun spending the cash that they had saved over the past year. Now the lockdowns have ended, activity is likely to return to pre-pandemic levels and the expectation is that inflation is likely to pick up, so economists are worried about inflation pressures.

In addition to this is the effect of government spending on stimulus packages on the economy, which could provide under the tail wind, however, experts believe it should not pose a longer term challenge to fixed income or equity markets.

The Bank of England does foresee inflation rising towards the 2% mark, but believes it will be a temporary phenomenon. Continuing deflationary forces, like age and demographics, technology innovation and global supply chains cast doubt over predictions of a new era of inflation. Ultimately, if you want to beat inflation in terms of finding some good returns on your savings, investing is the best option at the moment, due to cash saving rates being at such low levels. 

One of the best ways to ensure your investments are given the strongest opportunity to navigate the effects of inflation on financial markets is through a global multi-asset portfolio, that’s actively managed to buy a professional team of investors. It’s important to speak to a financial adviser about this to find out more. If you have any questions or topics you want us to discuss, please get in touch with us at CS Financial.