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The effects of rising inflation in the UK

The UK ended 2021 with consumer prices rising by 5.4%, which then hit a 30-year high of 5.5% in January 2022 – the highest inflation rate
since 1992.

For contrast, the previous rate was a mere 0.6% in December 2020, but the Consumer Price Index (CPI) charted a rapid increase over the following 12 to 13 months.

With inflation shooting past 4.8% in the winter of 2021, which hasn’t happened since the global financial crisis in 2008, there’s a lot of talk about a new ‘cost of living crisis’ for Britons.

But why is inflation continuing to increase, and what does it mean for you? Is it all bad news? GBAC – accountants in Barnsley – take a look at the state of inflation in 2022 and how you can expect things to change.

What is inflation?

Inflation is an economic measurement tracking the prices of goods and services for consumers. The inflation rate is recorded once a month, but people often compare it to previous annual rates to gauge changes in their ‘spending power’.

Since inflation rates have previously been low and slow, many of us don’t notice prices creeping up each month. However, prices have been rising so quickly in 2021 and 2022 that consumer wages simply can’t keep up with the increased cost of living.

The Office for National Statistics gathers and publishes data on inflation in the UK every month using the Consumer Price Index (CPI) and Retail Price Index (RPI). It notes the prices of hundreds of common goods, like bread and milk, to track price increases.

As an example, if inflation was 1% and a loaf of bread previously cost £1, it would now cost £1.01. When inflation jumps above 5%, as it did in January 2022, that same loaf would suddenly cost £1.06. This may not seem like much at first, but small increases across the board can soon add up.

Recently, you may have seen or heard campaigner Jack Monroe on social media, TV, or radio talking about the current effects of inflation
on the cost of basic supermarket goods, and how it hits lower income groups the hardest.

Unfortunately, this isn’t limited to just the UK. Over in the US, inflation rates have already soared above 7% – the highest since the 1980s – and inflation in the Eurozone also saw a record-breaking peak of 5.1% as of January 2022.

Why is inflation rising?

As most people are aware, the COVID-19 pandemic has caused a lot of damage to the economy, putting an increasing strain on businesses and consumers alike. The higher demand for goods and shipping disruptions combined to cause shortages that drove prices up, with Brexit contributing to supply chain problems between Europe and the UK.

Both the pandemic and Brexit have also resulted in widespread staff shortages. In order to attract more workers by paying higher wages, some employers ended up raising the prices for their products and services. This led to higher costs for everything from food and drink to furniture.

January is usually the best month for bargains due to post-Christmas sales, but 2022 saw the lowest discounts for clothes and footwear since 1990. Eating out and travelling have also become more expensive, with transport costs relating to cars, flights, and fuel contributing to inflation the most.

Unfortunately, staying at home isn’t likely to save you money, as the ‘home sector’ is the second largest contributor to rising inflation. This includes the costs of housing, electricity, water, and other fuels, with energy bills practically doubling for millions of people with variable contracts.

Here are the main components of inflation in 2022, in order from largest to smallest:

  • Transport
  • Housing, water, electricity, and gas
  • Restaurants and hotels
  • Food and non-alcoholic beverages
  • Furniture and household equipment
  • Recreation and culture
  • Clothing and footwear
  • Miscellaneous goods and services
  • Alcohol and tobacco
  • Education
  • Health

As the prices of essentials continue to surge, analysts are predicting that the UK inflation rate will surpass 7% this spring – the highest since 1991, when inflation hit 8.5%. The energy price hike and tax increases due in April are likely to squeeze budgets even further.

How will rising inflation affect me?

Inflation isn’t necessarily a bad thing, as it can encourage the production and purchase of more commodities. However, when inflation is vastly outpacing wage growth, as it is now, overall spending power is drastically reduced – meaning the average person can afford less than before.

The way inflation rates in 2022 will affect your finances depends on your individual circumstances, but it definitely means fewer luxuries for most. For low income earners already struggling to make ends meet, the impact could be severe. Here are some of the ways inflation may affect living costs:

  • Rising utility bills (by a minimum of 20-30%, up to an anticipated 54% for energy bills)
  • Buying groceries and fuelling vehicles will be more expensive, so you’ll get less for the same amount of money
  • Banks adjusting interest rates and loan rates, leading to lower returns for investors and savers and higher mortgage payments for some homeowners
  • National Insurance Contributions increasing by 1.25% from April 2022 for the Health and Social Care Levy
  • Rail fares increasing by 3.8% in England from March 2022

With all this doom and gloom, you might wonder if there’s actually any good news relating to UK inflation. Well, there are some – the price of petrol has fallen after surging in autumn 2021, and the National Living Wage is increasing by 6.6% in April 2022 for the lowest-paid workers.

Due to labour shortages in many industries, such as lorry drivers, wages in these sectors are rising more than others, so it’s possible to find a job that reduces the inflation gap in some cases.

Some economists are hopeful that the inflation spike
will be short-lived, even with the expected escalation at the start of the new tax year in April. The Bank of England believes that inflation will settle down and decrease to their target level of 2% in the next 2 years.

How can I protect my finances against inflation?

While the UK government considers monetary policy changes that might help to reduce inflation if it persists, it’s up to individuals to take stock of their own financial situation, including living costs and spending habits. Many will have to cut back on leisure and luxury purchases.

For those making investments, including pensions, bonds, dividends, and stocks, rising inflation may decrease the value of your savings and holdings. Real estate and mortgage costs are also likely to increase, affecting new buyers and certain existing homeowners.

Things like this are why financial planning, including tax-year-end planning, should always take inflation into account. If you would like help reviewing your spending, taxes, and savings, why not consult the experienced accountants at GBAC?

You can get in touch with us by calling 01226 298 298 or emailing info@gbac.co.uk
to discuss our services and find out how we can help you protect your finances in the face of inflation.