Anyone who reads our blogs, will often come across our warnings of inflation and the danger it presents to any economy. To “an average consumer”, it really is very hard to understand just how dangerous and damaging inflation is. The last time it was out of control in the UK was over 50 years ago now and sadly, people (even those alive at the time) don’t tend to remember just how awful it was!
Inflation simply translates into “the rise in the cost of prices”. There are many measures (Cpi, RPi etc) but each will take a specific “basket of goods” at a point in time and measure the cost of the same “basket” say a year later. So, a pint of milk costs an average of 50p on January 1st one year, if it costs 60p on January 1st the following year then the inflation rate was 20%. Why is this important? Because if you were a saver and earn 0.1% on your savings, your savings would be worth 20% less in a year and therefore you would want to spend too quickly to make the most of your money. The average shop-keeper would then put his costs up more quickly (because they knew their costs would be 20% more in a year) and then you get an “inflationary spiral”! Once begun, these spirals are almost impossible to control! The worker needs a pay rise as their wages buys less, the employer needs to increase their prices to pay the workers’ wages etc. Destroying wealth in a flash!
A stable economy is regarded as a key task of the Government so central banks are charged with maintaining inflation at a realistic and steady rate. In the UK, the Bank of England is targeted to maintain inflation at around 2%.
Just 8 months ago, Cpi inflation in the UK was just 0.3% whereas now it is 2.4% (June figure). A jump from 0.3% to 2.4% is a massive 8 times increase – that really is a huge figure. The Bank of England’s “target” is 2% so not massively different but the sheer scale of the increase has spooked some commentators, leading to instability and volatility in the markets.
Whenever we are investing our clients’ money, a key benchmark is inflation, at the end of the day we are charged to increase our clients “real wealth” in “real terms”. Meaning, we target inflation plus some. If inflation was to rise significantly this could lead to investors and professional fund managers to increase the risk they take to try and improve their returns. We check all our portfolios regularly to ensure this cannot happen and will intervene and advise our clients to change their investments if necessary! Contact your local experts to maintain your very own Financial Fortress!