The Bank of England’s interest rate hike at the end of last year to 0.25 per cent was met with surprise in some quarters.
The generally accepted view was that the BoE would wait until the effects of Omicron became clearer before applying the almost inevitable response to the unexpectedly high inflation rate published earlier in the week.
Whatever your view on whether the BoE would have been better to wait a few months, most commentators and those of us with more than a passing interest in these matters are more or less agreed that both figures herald a change in the financial environment to the one we have been used to for the past 10 years and more.
And the question for the advice industry, considering this, is: how will this impact on the advice I give to my clients seeking a steady return and income in what is looking like a less benign inflationary environment?
Let’s consider this. Since 1989 CPI has steadily been decreasing, on a largely downward trend, to 2 per cent in July 2021. However, since then, the trend has reversed and the concern must be whether this is going to continue. There is a clear argument that it will.
The factors that drive inflation are still there, one of the main ones being the rise in energy costs in the second half of last year. This adds to CPI itself, constituting as it does a large part of most people’s monthly budget, but also drives other costs, mainly through the impact it has on transport costs, and those in turn adding to the price of any transported goods.
However, the most concerning change we may be beginning to see is the start of wage inflation, as wage increases that were unheard of over the past 10 years are being rejected as unsatisfactory and higher demands met to avoid shortages.
Even in a benign inflationary environment with a low interest rate, consumers have always been recommended to put at least some of their savings in cash. Indeed, it is one of the Financial Conduct Authority’s main concerns that the advice gap is giving rise to a larger number of people who, while thinking they are doing the right thing, are actually sleepwalking into a situation where their hard-earned savings are being eroded through a low but steady inflation rate, coupled with an almost 0 per cent interest return on cash savings.
Research by the FCA identified that £10,000 saved in cash in 2008 would have been worth £11,720 by 2018, but if the same amount had been invested, it would have been worth £21,905 by the end of the same period – but investment can still seem too scary for consumers, who want instant access to their cash, particularly in uncertain times.
Look at it like this. In 1989, the cheapest new car on the market was a Lada Riva, retailing at £3,495 new on the road. Today, the equivalent sum is £8,761.