Inflation – What is it and how does it affect me?

on 01 July 2022

It’s hard to turn on the news and not hear the word inflation being mentioned, shortly followed by the “cost of living crisis”.

For many in the UK, this is a real issue and perhaps as a society, it’s an opportunity for those less affected, to support those who are. A good way to boost wellbeing is to provide planned support, via time or money, to causes that mean something to you.


What is inflation?

In short, it shows the rate that the same basket of goods and services has increased over the past year. Naturally we have done a podcast on this that goes in to more detail, click here to listen to Episode 20 – The Inflation Basket.

The Bank of England have a target of 2% a year for the Consumer Price Index (CPI). To its credit, it has managed this pretty well for the past couple of decades. However, May 2022’s figure was at 9.1%.


Why is it so high?

There are many factors as to why this has happened. Some of these include:

  • To support the economy during the Covid restrictions, the Bank of England kept interest rates low and effectively printed money. This means that people/businesses had more money to spend, which pushed up prices as there is high demand for goods and services.
  • Supply issues as demands on materials have outstripped production. For example, China have still been pursuing a covid restriction strategy, which has hampered production. Less supply means more demand and prices increase.
  • Russia’s invasion of Ukraine sharply increasing the price of energy as the West started to turn off its supply of Russian Gas.
  • Russia and Ukraine are major agricultural suppliers, for example wheat. With supplies reduced, this pushed up prices.
  • Large job vacancies in the UK pushes up wages as employers compete for talent. This means businesses need to increase the prices of their goods and services.


What is the Bank of England Doing?

They have two major tools to help reduce inflation;
  1. Increase interest rates so it’s more attractive to save and less attractive to borrow. This leads to people spending less.
  2. Turn off the money printer and reduce the money in the system.


What Next?

Unfortunately, we don’t own a crystal ball here at Ovation, but we do have over 20 years experience in financial planning. It’s worth remembering that inflation rates are based on a 12-month rolling period. Therefore, future increases will start to be calculated against the higher costs of goods and services.


What does this mean for you?

I’m sure you would have seen some of your bills increasing and last month’s newsletter provided some tips on how to budget and track your spending, which may help you to counter these increases.


Those in receipt of State pensions and most final salary pensions will likely see increases.


Those still working may start to see some pay increases at some point to reflect the increased cost of living. Although this may ironically keep inflation a little higher as people again have more money to spend.


In terms of your investments and pension funds, shares and bonds haven’t reacted well to Central Banks around the world increasing interest rates and tightening money supply. This has led to the value of portfolios reducing over the past 6 months.


However, over the longer term, we still firmly believe that globally diversified portfolios, like the one’s we manage here at Ovation, are the best way to ensure your money keeps up with inflation and helps you meet your future needs.Therefore, our message is to remain patient, we build robust financial plans here at Ovation so that you can weather short term uncertainties.

Also know that we are here to support you, so please feel free to contact us if you would like to discuss this further. Email Ovation: or call on 0117 942 4333.

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