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 but given it has been stubbornly high (over 10%) for quite a while this is leading to economic problems and shocks.
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%.
What are the repercussions of high inflation? Put simply, business’s raise their prices and workers subsequently demand bigger wages. When employers can’t or wont pay extra, workers strike and economic activity reduces. Sound familiar?
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. However, when inflation is too high, this is simply not possible without taking on board far more risk than our clients would be happy with. 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!