This week, inflation has hit a 10 year high and in an attempt to curb the rapid rise, the Bank Of England has raised interest rates to 0.25%. In his latest article, Independent Financial Adviser Joe McGovern provides his analysis. 

As the world battles supply chain issues and travel restrictions resulting from the pandemic, inflation has crept up. Steadily rising since the summer of 2021, largely driven by the rise in fuel prices, inflation hit a 10 year high of 5.1% in November, far exceeding expectations.

The Bank of England (BOE) had expected inflation to reach the 5% mark in Spring 2022, so we are well ahead of schedule. This has led to the BOE today (16.12.2021) raising interest rates to 0.25% in an attempt to apply the brakes to the spike in inflation, despite the uncertainty caused by the rapid spread of the Omicron variant.

This is likely to have a minimal effect on the rise in inflation and we therefore need to plan for it being a fact of life well into 2022.

This is concerning news for consumers and those on a fixed income. Often known as the silent killer, inflation erodes the purchasing power of money and investors have to be wary of potential impacts on asset prices. Interest rate rises from the BOE and other central banks will also play a role in the future returns for investor’s portfolios.

Our chosen client portfolios are diversified to help offset the impact of risks such as inflation. Remaining invested in the market is the best way to ensure that your money is still working for you and not being eroded by this silent killer over the long term. Our cashflow planning factors in inflation at 3%, allowing us to predict the real value of your future income and expenditure more accurately. We will continue to monitor this and advise clients whether this needs to be revisited should inflation remain stubbornly high – it will never come as a surprise.

However, analysts are predicting that won’t be the case and inflation should return to pre-pandemic levels, which in the UK was around 2%, once supply chains and global travel is fully back to normal when the pandemic eases.

Over in the US, The Federal Reserve’s longer term forecast echo’s that of the UK’s, also anticipating that inflation rates will indeed normalise back to pre-pandemic levels, therefore implying that it views inflation as a short term risk.

For the upcoming months into 2022, inflation will be often talked about in the media, but our view is to not let this distract you from your financial plan – believe in your plan, stay invested, and always keep a healthy emergency cash reserve. Let the equity investments do the heavy lifting, with cash purely acting as short-term buffer.

If you would like any further information or advice, please contact your financial adviser.