The news of late has not made pretty reading. Prices are up, adjusted wages for inflation are down and the economy has not been moving in the right direction. We, as consumers, are feeling the pinch. We are used to the rising cost of fuel as a direct reflection of rising prices and inflation but household budgets will pick up the increase in prices for further products as the post pandemic worldwide landscape settles the supply chains in an ever changing and dynamic global geopolitical environment.
So, this begs the question, when in history were inflation rates this high and what can we learn from it?
UK Inflation rates hit highs of 27% in 1975, 20% in the early 1980’s and just over 11% in the early 1990’s. This has been a distant memory over the past 30 years only for a high inflationary environment to rear its head once more. The world is a different place since the early 1990’s with access to cheap goods from China and other Asian countries and the access to Russian energy and commodities for European imports an integral part in the Euro zone’s economic growth. Globalisation has taken over since then with the interconnected nature of worldwide economies prospering from shared growth across the board.
Fast forward to the present and we see the CPI index at just over 6%. What happened? It would have taken something big to jolt the global economies back into this high inflation environment. Up steps the Covid-19 pandemic. As restrictions have eased, consumers are spending more which has driven up prices. This has shifted Government planning to more self-sufficiency and generating economic stimulus packages in order to assist consumers who were locked down over the past 2 years.
This self-sufficiency has begun with moves by the Government to ease the squeeze on household budgets already taking effect. The fuel duty has been cut by 5p per litre until March 2023, National Insurance thresholds have been raised, the Employment Allowance increased from £4k to £5k and a promised basic rate tax cut to 19% from 20% is in the works before 2024. The self-sufficiency has begun.
The tools to combat high inflation rates would be for the Bank of England to raise interest rates. Back in 1992, the interest rates were above 10%. They have been steadily decreasing to 0.1% recently. These rates have already begun to rise to 1% since December 2021 with more increases expected in light of many analysts seeing the inflation rate peak over 10% by the end of the year. So it will be likely that we will see more interest rate rises by the end of the year.
So what does this all mean for you, the consumer?
As a result of interest rates rising, three things will happen to you.