HAMISH MCRAE: Beware the spectre of inflation

Importance Score: 72 / 100 🔴

Looming Inflationary Pressures at the Dawn of New Fiscal Year

As the new fiscal year commences next week, businesses brace for a triple blow: increased National Insurance Contributions, a rise in the minimum wage, and escalating business rates. These financial headwinds are expected to intensify economic challenges for companies across the board.

Business Response to Mounting Costs

Staff Cuts and Closures

Insights into how companies are reacting to these changes are becoming apparent. Many are resorting to reducing their workforce to mitigate rising costs. Regrettably, some are ceasing operations entirely, a stark reality evidenced by the increasing number of vacant storefronts on our high streets.

Price Hikes and Inflation Surge

Businesses that manage to persevere are passing on the increased costs to consumers through elevated prices. This widespread practice suggests a significant upward pressure on inflation in the immediate future.

Discrepancies in Inflation Measurement

Questioning the CPI

While policymakers like Rachel Reeves have highlighted the drop in the Consumer Prices Index (CPI) to 2.8 percent in February, the CPI’s accuracy as a true reflection of inflation is debatable.

Alternative Inflation Metrics

Notably, the Chancellor overlooked mentioning the government’s preferred measure, CPIH, which includes owner-occupied housing costs and stood at 3.7 percent. Furthermore, the Retail Price Index (RPI), utilized for government index-linked gilts and numerous commercial agreements, was even higher at 3.4 percent. These figures predate the anticipated inflation surge expected in April.

Anticipating Higher Inflation Figures

The full extent of the inflationary impact will be revealed on May 13th. However, projections suggest inflation rates could climb above 4 percent, reflecting the mounting financial strain on businesses and consumers.

Nationwide Rate Increases Fuel Inflation

Council Tax Hikes

A significant contributing factor to rising inflation is the widespread increase in council tax. The majority of councils are implementing a 4.99 percent rate hike. Certain areas are experiencing even steeper increases, such as Bradford at 10 percent, and Newham, Windsor, and Maidenhead at 9 percent.

Regional Variations in Rate Rises

Scotland is witnessing even more dramatic increases, with at least 13 regions raising rates by 10 percent or more. Wales is also facing substantial rises, with ranges between 5 and 9.2 percent, further exacerbating household financial burdens.

Mobile and Utility Costs on the Rise

Compounding the issue, most mobile phone contracts, often linked to CPI or RPI, are also set to become more expensive. Similarly, energy providers are announcing unavoidable price increases for gas and electricity, citing external factors like global politics and Middle East conflicts as justifications. The energy price cap is scheduled to increase by 6.4 percent in April.

Challenging Inflation Targets and Economic Reality

Doubts on 2% Inflation Target

While not intending to criticize the Office for National Statistics or the Bank of England, the notion that inflation is merely 2.8 percent and will soon reach the 2 percent target appears increasingly unrealistic. This optimistic outlook clashes with the known increases in household bills and common-sense expectations for the coming months.

Increased Household Savings Amidst Uncertainty

Unsurprisingly, in anticipation of these rising costs, households are bolstering their savings at the highest rate since the pandemic. This precautionary measure underscores public apprehension about the mounting cost of living, even before potential tariff disputes emerge.

Tax Implications and Future Fiscal Policy

Looming Tax Hikes?

Beyond price increases, tax policies are also a critical concern. The question remains whether the upcoming autumn budget will bring tax increases or reductions, adding further uncertainty to the financial outlook.

Navigating Inflationary Uncertainty: Strategies for Resilience

Need for Realistic Economic Planning

Given the unlikelihood of achieving the 2 percent inflation target, a pragmatic approach is necessary. It is prudent to adopt a strategy of hoping for the best economic outcomes while preparing for more challenging scenarios. If inflation persists at or above 3-4 percent, the Bank of England will face severe constraints in lowering interest rates.

Interest Rate Outlook and Borrowing Strategies

Despite current financial market expectations for interest rate cuts this year, albeit with diminishing confidence, an upward movement in interest rates is not improbable. Longer-term borrowing costs may also escalate. The ten-year gilt yield, around 4.75 percent on Friday, up from below 4 percent a year prior, could potentially reach 5 percent or higher. In this environment, securing current mortgage rates or other borrowing terms may be a wise financial move.

Protecting Savings Against Inflation

It is essential to acknowledge that the real value of savings will likely continue to erode due to inflation. Therefore, allocating savings to assets that offer inflation protection is advisable.

Investment Options: Gold and Equities

While gold prices are currently at record highs, and despite increased investment in jewellery, UK equities may still present a viable investment opportunity.

Forewarned is Forearmed: Higher Inflation Anticipated

In conclusion, inflation is projected to surpass official forecasts. Being prepared for this eventuality is crucial for both businesses and individuals to navigate the evolving economic landscape.

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