Inflation exceeds government target for second month in a row
The UK’s rate of inflation in March was 2.3% according to the latest figures released by the Office for National Statistics (ONS).
Although the rate remains unchanged since February, it is the highest inflation has been since September 2013.
The 2.3% inflation rate refers to the new Consumer Prices Index including Housing costs (CPIH), which has been the government’s preferred measure of inflation since March 2017 (when February 2017’s inflation rate was announced). This is regarded as the most comprehensive measure of inflation because it incorporates the costs of home ownership including council tax. In all other areas it is the same as the Consumer Prices Index (CPI).
Inflation has been rising steadily since late 2015. The ONS attributes these increases to the rising prices of food, alcohol, tobacco, clothing and footwear, however greater increases were offset by decreasing transport costs.
Commenting on the figures, Maike Currie, investment director for personal investing at Fidelity International says: “Inflation exceeded the Bank of England’s 2% target rate for the second month running with today’s CPIH figure of 2.3% showing price rises unchanged from the previous month. A fall in air fares and petrol prices offset an increase in the cost of food, alcohol and tobacco, and clothing.
“Retail sales figures from the British Retail Consortium released overnight showed that the rise in inflation is already starting to bite, with non-food high street sales suffering the worst fall in nearly six years. With price rises outstripping wages, we are getting progressively poorer each month. Unsurprisingly, consumers are choosing to instead focus their spending on essential items like food and fuel. Changing shopping habits and a fall in spending should flash amber warning lights for an economy reliant on confident consumers hitting the shops.”
She adds: “Rising inflation also has implications for savers, investors and retirees as it erodes the spending power of future interest and dividend payments and eats away at the worth of your original capital.”
Rising inflation hits retirees
Annuity provider, Retirement Advantage, says that the current rate of inflation leaves the UK collectively needing a further £17.2 billion a year to maintain last year’s standard of living. This works out at £632.32 a year per UK household.
Inflation is usually felt most severely by those in retirement. Andrew Tully, pensions technical director at Retirement Advantage says: “Households across the country will feel the inflation squeeze as bills rise for everything from council tax, food and clothing, to water and other utilities.
“Although we will all feel the pinch, rising bills can have a devastating impact on people with fixed incomes, typically those in retirement. People will find their private pensions and savings will simply not go as far as they once did.”
Whether you are in work or retired it is important to protect yourself from rising inflation.
This means seeking out savings accounts and other investments that are likely to grow faster than inflation.
Ms Currie adds: “Inflation never looks like a problem, until suddenly it is a big problem. Once pricing pressures become entrenched, consumers’ feel the pain, companies don’t invest and the market gets worried. The time to protect yourself against the return of inflation is before it happens and physical assets such as gold, agriculture and property are all good protectors against the wealth-eroding effects of inflation. You can invest in gold via a fund which invests in the shares of gold mining companies, such as the Investec Global Gold Fund or tap into property via the BlackRock Global Property Securities Equity Tracker Fund which benefits from the liquidity offered by real estate equities.”
Kate Smith, head of pensions at Aegon, says that it’s also important for those in work to engage with their workplace pensions to ensure that their money is working as hard as it can. She says: “All figures point towards the UK entering a sustained period of higher inflation. During these times people must do all they can to protect their hard-earned pension savings from the corrosive effects of inflation. Too many people simply leave their savings languishing in workplace default funds, unlikely to outstrip inflation, and ultimately this will lead to a lower retirement income. People must engage with their pension savings now; taking steps such as selecting different investment funds, with the help of on-line tools, guidance or advice can really pay-off in the long term.”
Those who are in or approaching retirement also need to factor inflation into their plans to ensure that they can afford to pay their bills now and in the future.
Mr Tully says: “Our research shows people are worried about paying the bills and the rising cost of living, but how do you balance the need to live and also ensure your savings last the duration of your retirement? If you blend annuity and drawdown you can have the best of both worlds, with guaranteed income to pay the bills while funds invested can be seen as a natural hedge against inflation. Seeking professional financial advice can help you decide the best course of action for your personal circumstances and ensure you enjoy the retirement you have worked hard for.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.