Expanding inflation

By Tom McPhail | 17 Jul, 2008 

The latest inflation numbers from the Office for National Statistics have confirmed that daily living is getting more expensive, and that it is getting worse not better; this is a challenge for millions of people, and the year ahead is likely to be a tough one.

The cost of living rose by 3.8% to July 2008, according to the official CPI measure, but within that figure were some big variations. Food inflation, which tends to affect low earners more than the wealthy, is running at over 10% per annum. Fuel bills are up nearly 14% compared to a year ago. By contrast footwear and clothing have come down in cost, as have mortgage payments – though I suspect that some individuals may dispute that last point.

If it is any comfort, the Bank of England had told us that this was going to happen earlier this year. The Bank also predicted that inflation would peak sharply in the third or fourth quarter of this year and start to drop away again quite sharply thereafter.

Employers are under pressure, with raw material costs rising sharply, and turnover stalling, they don’t want to start handing out pay rises; and neither does the Bank, as this would start another round of inflation. If we can get through the next six to twelve months, then the picture may start to improve. In the meantime though, attention to the fundamentals is essential: reduce outgoings wherever possible; if ever there was a time to give your income and expenditure a complete makeover, this is it; clear expensive debt like credit cards and make sure you are getting the best possible rate on any cash deposits.

For longer term investors, this may yet prove to be a good time to invest, as the markets always run ahead of the economy, and by the time the economic pressures ease, the markets will already have moved ahead.