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Since early 2021, the cost of living has been rising more than in previous years. Today, inflation stands at its highest level in 40 years (9% in the 12 months to April 2022). Yet why are living costs rising, and what can be done about it? What implications are there for households and for financial planning?
Below, our team at Wealth Solutions offers some answers. We hope this is helpful to you. If you’d like to speak to an independent financial adviser then you can reach us via:
T: Edgbaston 0121 446 5815
T: Warwick 01926 888091
E: [email protected]
Why are living costs rising in 2022?
When the overall cost of goods and services rises in an economy, this is called inflation. A bit of inflation is inevitable in a healthy economy, so the Bank of England (BoE) aims for a target of 2% each year. This helps ensure that UK gross domestic product (GDP) is growing, but keeps prices under control for the majority of consumers.
Inflation is measured primarily by using the Consumer Price Index (CPI), which records the cost of 600 different goods and services. Each month, their prices are collected from around 120,000 different retailing outlets. The percentage difference in the aggregate from 12 months ago is then published – providing everyone with a recognised rate of UK inflation.
However, the CPI uses a “geometric mean” to produce its results. This means that it is possible for some prices to rise whilst others fall, yet the inflation rate remains fairly steady. In the UK, the inflation rise has been driven primarily by increasing energy costs.
This has a huge knock-on effect to the rest of the economy, since all sectors rely on oil and other energy sources. Supermarkets need oil-powered lorries to transport goods to their outlets, for instance, whilst technology firms require power to run their computer systems.
A range of factors lie behind the rise in energy costs over the last 12 months. In particular:
- The lifting of national lockdown restrictions in mid-2021, leading to increased energy demand (e.g. commuters returning to the office).
- A particularly cold winter in Europe and Asia in 2021, which caused the former to consume much of its energy reserves. Now, these need to be replenished.
- The Russian invasion of Ukraine in February 2022. This led to widespread international condemnation and sanctions on Russia; a major global producer of oil. Ukraine – also a large exporter of agricultural goods to the world – has also struggled to get shipments out of its ports due to naval blockade.
What can I do about my rising energy costs?
Unfortunately, UK energy prices are largely dictated by global wholesale prices for gas and oil (even if Russia provides scant energy imports to the UK). As these prices rise, UK energy companies must charge more to remain profitable. In fact, prices have risen so quickly that 31 energy firms have gone bust – leaving over 2m UK customers in need of a replacement supplier.
This situation has led the UK’s energy regulator – Ofgem – to raise the energy price cap in April 2021 to £1,971 per year (up from £1,277). This 54% rise is expected to accompany a further rise in October 2022, to £2,879. Frustratingly, there are very few “deals” to be found amongst energy firms right now. As such, those still on their fixed rate would likely do well to stay on it until their deal runs out. When this happens, make sure your budget is prepared for a rise in monthly energy costs.
The UK government has promised to offer some financial support to households. In October, a £400 non-repayable grant will be provided to help everyone manage the energy cost rise. The 8m lowest income households will also get a £650 payment. However, even with this support, many households will likely still face a higher energy bill.
This, of course, bears upon your financial plan. More immediately, you could consider cutting back on energy consumption and possibly investing in making your home more energy efficient. For instance, switching off lights in unused rooms, buying LED lights and reducing water use can all help. You could also consider buying a double-glazed door to reduce draughts, install loft insulation or buy some smart automated devices to turn off appliances when unused.
Inflation also has implications for your investment plan. Remember, inflation reduces your “real returns” by eroding the value of money. If £1 used to buy you a £1 chocolate bar in 2021 but inflation rises by 10% in 2022, then you will need 10p extra. Looking at your investments, if your portfolio grows 6% in value but inflation is 10%, then in real terms it has shrunk by 4%. Here, it is important to not panic or make rash decisions to try and beat inflation. Speak to your financial planner if you are concerned and keep up your contributions.
We hope this content has been informative and inspired you to develop your own financial plan. Please get in touch if you’d like to discuss these matters with us via a free, no-commitment consultation with a member of our team:
T: 0121 446 5815
E: [email protected]