Will higher inflation remain or is it slowing down?

The rate of inflation has continued to rise in the UK each month, growing from 0.7 per cent in January 2021 to more than 5 per cent in December last year. 


This is far higher than the Bank of England’s (BoE) long-term target of two per cent, which is why it is now taking steps to increase the base rate incrementally to try and minimise further rises. 


However, despite their recent action, figures published by the Office for National Statistics (ONS) show the rate of inflation recently hit 5.5 per cent – the highest level in almost 30 years. 


Will the rate of inflation continue to rise? 


Economists and the banking sector anticipate further increases in inflation in the months ahead due to the cost crisis that the UK faces. 


Nealy half of companies recently surveyed have said that they anticipate price rises over the coming year and the escalation of conflict in Ukraine and the associated sanctions against Russia mean that costs are likely to rise faster, especially if gas and oil supplies are affected. 


Beyond this immediate global crisis, costs were already rising for most businesses and will rise further with the impact of the National Minimum Wage rise and National Insurance increase in April.


They also face labour shortages due to Brexit and the pandemic, which are forcing up regular wages across industry as well. The supply of certain goods is also in short supply, such as computer chips, due to the after-effects of COVID-19 on production worldwide.


Inevitably, in response to these rising costs, businesses have to increase their own prices to remain profitable resulting in greater inflation. 


Perhaps the question is not will inflation continue to rise? But rather by how much. At the moment this is hard to predict as there are many variables that could affect the cost of goods and services. 


Even if the conflict in Ukraine ends and relations between Russia and the West improve, leading to lower oil and gas prices, the impact of recent events may leave a lasting impression on inflation in the UK and around the world for some time. 




At the moment the BoE’s future strategy is not entirely clear, but further increases in the interest rate are likely. 


However, the BoE must walk a careful line when doing this so as not to drastically increase the costs of borrowing or servicing existing debts, which could cause prices to rise as well. 


The world has rarely faced such a challenging, complex and uncertain period and so it is important that investors remain hyper-vigilant in the weeks and months ahead so that they can react to sudden, unexpected changes. 


Having a trusted independent financial adviser by your side could make a considerable difference to your future. 


Link: Is inflation here to stay?

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Posted in IFA News.