Rising Inflation: A New Conundrum in the UK?

Published Sep 20, 2021

Michael Worledge, Head of Financial Services Research

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For those who have been following the recent economic news, it shouldn’t be surprising to read that UK shoppers have returned to the high street in record numbers, driving up the pent-up demand created by a long period of restrictions and lockdowns.

There is no doubt that this is good news for businesses in the UK, from fashion to hospitality, who have suffered large losses because of the COVID-19 pandemic. Indeed, for many, the next six months of increased economic activity will be crucial for balancing the books and recovering from the ills of the harsh economic climate experienced in 2020.

However, this increased demand—along with supply chain issues created as a result of Brexit, transport problems, and a significant increase in shipment freight costs—is pushing up the prices of day-to-day items. To that point, Andy Haldane, the now-departed chief economist of the Bank of England, warned that consumer prices could drive up the UK inflation to 4% by the end of the year—a figure last noted in 2011 and twice the inflation target of 2% set by the UK Government for the Bank of England.

Is this good or bad news?

Depending on the generation you belong to and the impact COVID has had on your situation, the answer is a bit of both.

To understand the issue in detail, we need to first understand the pandemic’s impact on household and personal finances. With the economy in lockdown, businesses and employees were supported by the Government schemes. We know that these schemes helped save jobs, but not everyone was spared. Many in effect took a smaller take-home pay, while the income of many in self-employment also dried up.

Our bi-annual Financial Services Sentiment Indicator, which surveyed 1,000 UK adults aged 18+, confirmed as much:

One in five (21%) have experienced a worsening of the household financial situation in the last 12 months, and the problem seems most acute amongst those aged 45+ (30%). For a quarter (25%) of consumers, this has also resulted in a decrease in household financial savings.

When asked about their biggest financial worries, one in three mentioned the rising cost of household bills. Second on the list is increasing inflation, mentioned by one in four. Third on the list of worries is an inability to save enough/insufficient retirement savings.

Combined with rising prices of essential items such as food, second-hand cars, clothing and footwear, and fuel, it’s creating a perfect storm. The middle-aged population is concerned, and unchecked inflation could make matters worse.

What about the younger generations?

Regularly rising prices could create an environment similar to the 1970s, during which inflation was a part of life. The younger generation of that time got on to the housing ladder and stretched themselves as much as possible, taking comfort from the fact that increasing inflation would push both housing prices and their salaries upwards—and make them wealthy as a result.

Understanding inflation and its impact is crucial to adopting financial strategies that could help in negating its impact or, better still, riding it and creating wealth.

Do people understand the rate of inflation?

With over a decade of low inflation and a low-interest environment, inflation has perhaps been a forgotten word in the UK.

When asked if they knew the current rate of inflation, almost half (48%) of respondents did not know. To add to that, most who offered a figure were way off the mark, leaving only a few (less than one in 20) who knew the current rate of inflation. Likewise, when asked for the Bank of England’s inflation target, set by the UK Government, two-thirds (62%) were unable to answer—and, again, most answered with an incorrect figure.

That’s not even to mention the different measures of inflation such as CPI, CPIH, and RPI, with only 14% of respondents claiming to understand each concept.

It is clear that we are all going to be impacted by inflation. The commentary by the central bank suggests that the rise in inflation may well be a temporary or transitional thing as the economies around the world emerge from an extraordinary year, but the effect of this will be permanent in many respects. No doubt there is an increased pressure on the central bank to act and tame the rate of inflation. There is also pressure on the Chancellor to balance the books to pay for the biggest peace-time spending that we have seen in the UK. How this influences Government policy is an area many in the UK are feeling both curious and anxious about.


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