Inflation, the bogey of central banks, savers and shoppers alike, is rearing its ugly head once more.
Consumer Prices Index inflation, though down slightly in September to 3.1 per cent from 3.2 per cent in August, is predicted heading for double the Bank of England’s target of two per cent.
City analyst Mohamed El-Erian, president of Queens’ College, Cambridge, has warned it could quite easily go to eight per cent – last reached in 1991.
Some pundits have delighted in harking back to the infamous Winter of Discontent even though we are talking a mid-1970s figure of 27 per cent inflation – hardly comparable.
Yet sufficiently worrying for the BoE governor Andrew Bailey to declare it “will have to act” though giving no indication of when there could be an increase from the current record low of 0.1 per cent.
Financial commentators expect rates to go up later this year or early 2022.
The BoE’s Monetary Policy Committee believes the inflation leap will only be temporary returning to target by 2023.
The view seems to be this is a blip caused by stresses and strains of the world economic bounce-back from Covid coupled in the UK’s case by Brexit hiccups.
These factors are claimed to be behind the lorry driver shortage and empty supermarket shelves.
However, are there underlying structural issues with our economy?
The soaring price of gas has again highlighted our energy exposure.
In the past, OPEC and the Gulf states have held us to ransom over oil. Now, with gas, the blame has shifted in the direction of alleged Russian mendacity.
Today once great King Coal is much diminished. Most of our nuclear power stations are old and being shut down, with new ones yet to come on stream or still waiting the go-ahead. Wind power has grown hugely and set to expand even further, but depends on the wind blowing. For now, the gaps are filled largely by gas, which ultimately the Government wants to phase out as we move towards carbon neutral and a target date of 2050. All a juggling act which leaves our power balance precarious, bills rising and ongoing implications for inflation.
Similarly, there are issues with productivity, investment and jobs. The Government view is that companies should boost wages to fill labour gaps, with the goal of a high wage, high productivity economy. Weaning ourselves off cheap foreign labour, now greatly restricted by Brexit. But higher wages could push up inflation unless there are indeed productivity improvements. Productivity has been poor for a decade in part because business has failed to invest sufficiently in skills and training. Exacerbated by the education system. There are about 8.7 million people in the UK classed as “economically inactive”, a diverse coalition of students, the sick, carers, retirees and others. Arguably, we are producing too many students and not enough apprentices.
All in all, given these structural challenges, inflation remains a concern going forward.
Even at 2.5 per cent it will reduce the spending power of cash by around 40 per cent over a 20-year period – the length of a typical retirement in the UK.
With interest rates currently at historic lows, returns on cash savings are near zero.
In a recent poll of 500 This is Money readers, 43 per cent said they had more than £100,000 tied up this way, so for some people the effect of inflation on their wealth could spell a substantial loss.
Better to look for alternative homes for money that offer the prospect of real term growth.
A well-diversified portfolio of assets should serve you well, but understand the risks.