What’s going on with inflation?

Why is everyone so worried about 2.9% inflation? It doesn’t sound very high…


Why worry about inflation?

Inflation is still on the rise, and the latest figures show it hit 2.9% in May. It's not exactly running away, and for those who lived through the 1970s, when inflation was in double-figures, it doesn't seem particularly alarming. So why are people getting so concerned?

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Maike Currie, investment director for personal investing at Fidelity International, says these are unusual figures: "These levels have not been seen since June 2013 - it is now almost a percentage point higher than the Bank of England target."

Inflation isn't necessary a bad thing in itself, in fact we get every bit as worried about deflation as we do about inflation. Even in a time of low interest rates, as long as wages and prices continue to rise slowly, and in step with one another, it shouldn't be anything to frighten the horses.

We all suffer

The trouble is that in this instance, inflation is being driven to a large extent by the collapse in the pound, and the rising price of everything we import. It means that it's outstripping wage inflation. Paresh Davdra, CEO and Co-Founder of RationalFX explains: "The sharp rise in inflation is currently outpacing earnings, which are falling at the fastest rate in three years – effectively tightening the squeeze on consumers and household budgets."

For individuals, this is incredibly difficult, because it means we are effectively living off less and less money each month. For those who were already struggling to get by, this could be the straw that breaks the camel's back.

Even for pensioners, whose state pensions are protected by the triple lock, inflation may well eat away at private and occupational pension income - unless they are index-linked. For some, it will take a heavy toll on their retirement income.

Kate Smith, Head of Pensions at Aegon says: "Our own research suggests that four out of five people are worried they won't be able to maintain their current lifestyle under these conditions. The impact of inflation particularly affects pensioners stuck on fixed incomes, so planning is crucial for anyone who wants to ride out the damaging effects of inflation."

The economy struggles too

For the economy as a whole it's bad news too. Currie explains: "This is impacting UK consumer spending, which fell for the first time in nearly four years in May as consumers tightened their belts. This is bad news for an economy which relies on confident consumers spending on goods and services - already we are seeing signs of a stagnating economy as confidence among companies and consumers falter."

For savers, there's the additional blow that at a time of rock-bottom interest rates, it's almost impossible to find a home for your money that keeps pace with inflation. Aside from certain current accounts, and monthly saver accounts, money in every other kind of account will be losing value every month through inflation.

The weakness in the economy means the Bank of England is likely to hold off from raising interest rates soon, which means savers will remain under pressure.

Unfortunately, the political turmoil currently gripping the country means that the pound isn't likely to recover in the immediate future, and things could get even worse. It means we could see inflation rise again this summer. Michael Baxter, Economics Commentator for The Share Centre says: "Sterling has fallen sharply since the UK election, and unless this fall reverses, we may see another currency related jump in inflation, a few months down the line."

It seems, therefore, that the pain is far from over - which is why despite being relatively low in a historic context, the experts are seeing 2.9% inflation as a reason to sound the alarm bells.

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