OVER the last two weeks we have covered the cause of inflation and what that might mean for its future. For now, though, we have it. So who are the winners and losers?
Naturally all those with savings are having a very tough time. With interest rates in savings accounts at around one per cent and inflation forecasted to hit eight per cent, the real value of their money is falling at seven per cent per year. If those savers are taking an income or withdrawing from it, this is damaging their wealth at a rate they may not be able to recover from.
Savings rates are in no hurry upwards. Unfortunately, those with low savings tend to need access to it with no risk, and with a very low attitude to risk, it’s hard to see where they can invest their money, given the higher values attributed to bonds and of course property at the moment.
Inflation is expected to lessen towards the end of the year to around 3.7 per cent and further into 2023 to reach the target of two per cent according to the Bank of England. With the expected interest rate rises to 1.5 per cent, there is a potential for loss of growth in the economy, so be sure your pension or ISA manager is active rather than the ‘sit, hold and watch it’ ferment policy that many large funds have.
As interest rates rise, this discourages borrowing and spending, and this of course, cools off demand, which if handled correctly with a steady hand, will slow inflation. If knee jerked too much, this could of course turn into lasting damage to the recovery, and, in turn, also create a deflationary environment. My view, and that of others, if the supply chain issues are resolved, inflation will also resolve itself.
Also impacted is the section of society which has not seen wage rises. This is the story very much behind the rich getting richer and so forth. The poorer don’t have savings, and, those which they do have, will be in cash which is being battered by inflation. The richer, however, hold shares and investments which can benefit from inflation. Those unskilled in their jobs also hold dampened bargaining powers with employers. It’s a sad state of affairs and it’s a real let down on society as a whole.
It’s not how it’s supposed to be.
It is also a difficult one to call by the Monetary Policy Committee, because many businesses have been hit hard with increasing costs and have been unable to pass those on to their customers. With staff looking down the barrel of 7-8 per cent inflation, their real wealth is depreciating. The real concern with the banks is that we create wage inflation which will be passed on to the customer, creating the tornado of upward pressure on inflation, and into a negative feedback loop.
I believe inflation will become worse before it gets better but the strategy of raising rates by the bank of England is too high a risk for a fragile and uncertain economy such as the UK’s.
So, who are those benefitting? A home-owner with a mortgage who is locked in at a low rate is doubly delighted. Their payment rate is below inflation, so every percentage that it rises above that, decreases the real value of their existing mortgage. Furthermore, as property has been a target for safety for investors, the capital value our homes has also risen.
Over the last six months, markets have had a very tough time, but value stocks (rather than growth stocks) have held up well as they are seen as a hedge against inflation.
It won’t be popular to hear but banks should do well in this type of market. I’ll explain why. A yield curve is a measure of the difference between long term rates and short-term rates. Currently the curve is steepening and such a widening curve creates a beautiful playground for domestic banks profits, so it’s natural that their share prices will follow.
Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. To have your financial query answered, call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit wwfp.net.
