Tag: inflation


What Does Rising Inflation Mean for Wage Growth?

The UK is facing a cost of living crisis, with inflation hitting 6.2% in February 2022, and according to the Office for Budget Responsibility, it could average at 7.4% this year. But people’s wages aren’t going up at the same rate, despite the words “high wages” effortlessly tripping off the tongues of government ministers only a few months ago.

For example, in an interview on The Andrew Marr Show ahead of his speech at the Conservative Party conference, Prime Minister Boris Johnson said: “Finally after all these years you’re seeing growth in wages.

“Wages are finally going up for the low-paid, and they’re going up faster than for those on high incomes. And about time too… Wages have been totally flatlining for more than a decade.”

Despite being challenged about wages going down, not up, in real terms, Mr. Johnson stuck with this line throughout the interview, and then in his keynote speech, he said the UK is becoming a “high wage, high skill, high productivity” economy.

What the data says

But the numbers back in October and the figures today tell a different story. According to the Office for National Statistics, average earnings did go up in the three months to January by 3.8%, up from 3.7% a month earlier.

However, this rate of increase is well behind the surge in inflation, which is currently at a 30-year high, and means wages fell by 1% in real terms. That’s the biggest real terms fall in wages since 2014, so claims that wages are going up are likely to ring hollow for many struggling households.

The Resolution Foundation, meanwhile, predicts that real household income per person will fall by 2.2% in 2022/23. This would be the biggest fall in a single financial year since records began in 1956/57. Estimates from the body suggest that the current fall in real wages won’t end until at least late 2023, by which time average wages will be no higher than they were in 2007.

Significantly, high wages were not mentioned even once in Chancellor Rishi Sunak’s recent Spring Statement – an acknowledgement perhaps that ministers have recognised that last autumn’s interpretation of the figures hasn’t landed with the public.

Employers under pressure over wages

The disparity between wage growth and inflation is also leading to some employers being placed under close scrutiny.

For example, supermarket chain Sainsbury’s has been urged by a group of investors, brought together by responsible investment charity ShareAction, to commit to paying all its staff the real Living Wage, which is set by the Living Wage Foundation charity and currently stands at £11.05 in London and £9.90 for the rest of the UK.

Earlier this year, Sainsbury’s announced it would increase its basic pay rate from £9.50 to £10 an hour, which is above the real Living Wage outside London. Staff in inner London are paid £11.05 an hour, in line with the real Living Wage, but workers in outer London are receiving £10.50 an hour, which falls short.

Martin Buttle, head of good work at ShareAction, said: “Low-paid workers in the supermarket sector are being hit incredibly hard by rising living costs, yet we all owe them so much following the pandemic.”

This is just one example of how pay structures at major companies are coming under close scrutiny as hard-pressed workers struggle to make ends meet, and something we could see much more of in the next few months as the cost of living crisis bites.

But employers aren’t immune to rising costs either, and following the Spring Statement, the CBI urged the government to do more to “tackle the current challenges facing firms.”

Ministers face a tough balancing act right now, as they seek to minimise the impact of rising inflation while encouraging consumers to spend and businesses to invest, in order to drive growth.


Is there any reason to worry about inflation?

If you’re the sort of person who likes their glass half-empty then there will be plenty of opportunities to find something to worry about at the moment. The recovery from the pandemic, global tensions and all the staff shortages in the news can turn anyone into a pessimist. 

On top of that, some are suggesting that we need to start worrying about a word that has hardly been on anyone’s lips for the last few years – inflation.  There are even fears that the policymakers could “choke off” the economic recovery because of worries about inflation. 

In the recent past, most economies have been worrying not about inflation, but about deflation – which can cause economies to stagnate. Seemingly suddenly, the effects of Covid are causing prices to rise, and we’re hearing more and more about supply chain inflation. Simply put, manufacturers are having to pay more for raw materials because of delays and disruption caused by the pandemic. That cost carries down the line, and inevitably, this will result in higher prices to consumers. 

The Bank of England’s departing chief economist Andy Haldane has warned that inflation is “rising fast” and could reach nearly 4% this year – well above the Bank’s target rate of 2% (which was exceeded in May, when inflation reached 2.1%). 

The Bank’s Monetary Policy Committee is slightly less hawkish, saying that it expects inflation to go above 3% “for a temporary period.” The Resolution Foundation, a well-known think tank, sides with Mr Haldane, arguing that as the economy opens up and consumers start to spend the savings they accumulated during lockdown inflation will be driven up. 

Concerns are also being voiced in Europe – which has suffered from too little inflation for almost the last decade – and in the US, with the Wall Street Journal forcibly making the point that it is supply problems causing the rise in prices, not an increase in consumer demand. 

Whoever is right, inflation is something worth keeping an eye on. Inflation has the potential to impact the value of savings and investments, and interest rates paid on deposit accounts remain at, or very close to, historic lows. If inflation does reach 4% then a deposit account paying less than 1% is going to look remarkably unattractive. 

It’s not all doom and gloom, as with most things, a little planning goes a long way. Regular contact with your financial professionals and regular reviews of portfolios is as important as ever.






Inflation Rates: What’s Pushing our Prices Up or Down?

The ONS (Office of National Statistics) revealed recently that the UK inflation rate had dropped to 2% in December 2013, but what actually contributes to influencing our inflation rate, moving the prices of the goods we use up or down?

Over the last five years, the three main contributors to the 12-month inflation rate were food & non-alcoholic beverages, housing, water, electricity, gas & other fuels, and transport (including motor fuels). Combined, these three sectors have, on average, accounted for over half of the 12 month inflation rate each month.

The largest downward contributions to the change in the CPI 12-month rate between November and December 2013 came from food & non-alcoholic beverages. Prices overall rose between November and December 2013 as they do between these months in most years. The rate of the rise was smaller than between the same two months in 2012 and was the smallest it has been since 2006. The downward contribution came from price movements for most foodstuffs and non-alcoholic beverages, with the largest contributions coming from price movements for fruit and meat.

These downward contributions were partially offset by an upward contribution from prices for bread and cereals where the rate of price increases has accelerated. Looking over the longer term, inflation for food and non-alcoholic beverages has grown at a faster rate than overall inflation in each of the last eight years.

Overall, the cost of recreation and culture fell at a quicker rate between November and December 2013 than between the same two months in 2012. The downward contribution came from across the sector, with the largest contribution coming from prices for games, toys and hobbies – notably computer games, where there were reports of sales and lower priced games on older platforms.

The largest (though relatively small compared to many months) upward contribution to the change in the CPI 12 month rate between November and December 2013, came from transport, where prices overall rose at a quicker rate between November and December 2013 than between the same two months in 2012.

The majority of the upward contribution came from prices for petrol and diesel. Petrol prices rose by 0.5 pence per litre between November and December 2013 compared with a fall of 2.8 pence per litre between the same two months in 2012, to stand at 130.4 pence. Diesel prices rose by 0.8 pence per litre between November and December 2013 compared with a fall of 1.4 pence per litre between the same two months in 2013, to stand at 138.3 pence. The upward contribution was partially offset by air fares where prices increased between November and December 2013 as usual, but at a slower rate than in 2012.

Sources: www.ons.gov.uk

building your financial future

Cost of motoring miles ahead of inflation

The RAC’s annual Cost of Motoring index has revealed the average cost of keeping a car on the road to be a staggering £6,689 per annum, a rise of 14% (£819) on last year. That’s an average of £128.64 per week and 55.74 pence per mile, but however you dress it up it is surely a hefty blow to Britain’s already cash-strapped motorists.

The Cost of Motoring Index, which is based on a pool of 17 new cars weighted by their ownership, is calculated by taking into consideration all the various financial outgoings associated with owning a new car. These include: depreciation, finance, service, maintenance, repair, fuel, insurance, road tax and breakdown cover.

The area that saw the sharpest rise was fuel, the annual cost of which has risen by £160 to £1,458 – a 12.4% increase in just one year.

Insurance costs have also been heavily affected, with the costs for insurers from personal injury claims and associated legal costs, insurance fraud and uninsured drivers involved in accidents, all pushing the price up sharply. A rise of 14.4% to an average of £551 means that the cost of insurance is now an alarming 35% higher than in 2009.

Adrian Tink, RAC motoring strategist, comments: “This year’s Cost of Motoring index highlights the tough conditions being faced by Britain’s motorists. With the annual cost of motoring approaching seven thousand pounds the price burden of car ownership is hitting drivers hard.

“…UK drivers want to see action from the Government. Last week’s Commons debate, prompted by the Fair Fuel UK campaign, showed the real depth of feeling across the country on the issue. At the very least, we are calling for the scrapping of next year’s planned fuel duty increases.”

Tink also called on oil companies to be more transparent over pricing and to allow drivers to know exactly where their money is going. With both Shell and Exxon recording a sharp increase in profits in the wake of rising oil prices, motorists are, not surprisingly, demanding more information.

Moving from RPI to CPI

In June 2010, the coalition government announced that, in future, state and public service pensions would increase in line with the Consumer Price Index (CPI) rather than the Retail Prices Index (RPI). The change aims to help the government cut the UK’s sizeable budget deficit.

CPI does not include housing-related costs such as mortgage interest payments, buildings insurance and council tax. The rate of CPI has therefore tended to run below that of RPI in recent years and the government contends that CPI is a more appropriate measure of inflation because it strips out these costs (which are considered less relevant to pensioners who, arguably, will have repaid any mortgage by the time they retire). To ensure consistency, the government subsequently applied this ruling to occupational pensions. However, this triggered a complex debate over whether private pension schemes would be able to move to CPI. According to a survey by the National Association of Pension Funds (NAPF) published in December 2010, many such schemes have RPI indexation specifically written into their scheme rules.

The NAPF warned against any ensuing uncertainty, suggesting pension funds might find it difficult to plan ahead. In the same survey, they stated a belief that switching to CPI could increase flexibility for pension funds, but suggested the implications for current and future pensioners needed to be carefully considered to ensure the full facts were understood. Movement among pension funds was swift, however, and KPMG’s 2011 Pensions Accounting Survey showing that many companies have already benefited from making the switch.

Inflation Update – Easing off Slightly

Inflationary pressures in the UK eased slightly during June, curbed by weaker consumer spending. The Consumer Price Index (CPI) rose at an annualised rate of 4.2% during June, down from 4.5% in May, which, according to the Office of National Statistics, was primarily the result of lower prices for recreational goods such as computer games, toys, televisions, and digital cameras.

Nevertheless, the rate of inflation remains significantly higher than the Bank of England’s (BoE’s) government-set target of 2%, although the Monetary Policy Committee’s (MPC) latest inflation report indicates they believe inflation will subside below target after 2012. In the meantime, the MPC continues to grapple with the conundrum of how best to cool inflationary pressures without derailing the UK’s sluggish economic recovery. Interest rates have now been at a record low of 0.5% for over 2 years yet seven members of the nine-person MPC voted in favour of maintaining this low, believing that higher tax rates and cuts in public spending are set to have a further depressive effect on prices

The British Chambers of Commerce (BCC) has pointed out that many of the factors fuelling inflation are beyond the control of the MPC: domestic inflationary pressures are being exacerbated by external factors, such as natural disasters and war in key commodity-producing countries. As a result, the BCC has urged policymakers to postpone any increases in interest rates until the fourth quarter of 2011 at the earliest.

Premium Bonds ? What are they Worth?

What is the real rate of return on Premium bonds? – as a personal investor you do not know – so are they really value for money?

If you ask a anonymous subscriber from Surrey who picked up the Jackpot of £1m in June 2009 – then YES !!

But what about if you are not so lucky to scoop the jackpot – what do you have to look for?

1. Always Record your Winnings – this will give you the ability to know your exact rate of return for your investment, even if you buy more bonds with your winnings

2. Watch Inflation – inflation can erode your buying power over time and if you are not getting a return on your investment this could be detremental

3. Watch Cash Rate Returns – if cash rate returns are better than you are receiving on Premium Bonds it could be time to think about your investment – remember watch out for the tax on other investments especially Higher Rate payers !

There are no certainties – Premium Bonds are like buying a lottery ticket, but you can get your money back if you don’t win !

Premium Bond facts

The current Premium Bonds prize fund rate is 1.0% tax-free.

The current odds of each £1 Bond number winning any prize are 36,000 to 1, so with average luck, an investor with £30,000 in Premium Bonds could win 10 tax-free prizes a year. At the end of February 2009, over 23 million people had a total of over £40 billion invested in Premium Bonds.

Premium Bonds can be bought online at www.nsandi.com, by telephone on 0500 007 007, by post and over the counter at Post Office® branches, and brochures can be picked up in WHSmith in 400 of its High Street stores and 155 of its travel stores.

Like all NS&I products, Premium Bonds offer investors 100% capital security, backed by HM Treasury, as well as the sense of fun that comes from potentially winning tax-free prizes.

Since the first Premium Bonds prize draw in 1957, over 190 million tax–free prizes worth over £12 billion have been paid out. Prizes range from £25 to £1 million.

There are currently over 594,000 unclaimed Premium Bond prizes, worth over £35 million. There is no time limit for claiming prizes. Premium Bonds investors can check to see if they have won by visiting www.nsandi.com and using the Premium Bonds prize checker.

All Premium Bonds prizes are free of UK Income Tax and Capital Gains Tax