Business

Peter McGahan: What is inflation and why does it matter?

Inflation really does matter, as it wipes out your financial security and it hurts us all
Inflation really does matter, as it wipes out your financial security and it hurts us all Inflation really does matter, as it wipes out your financial security and it hurts us all

FOR the most part, society looks at this as being ‘out of their control’ and the numbers are as meaningful or interesting as a party-political broadcast, whilst eating last night’s cold chips.

But inflation really does matter. It wipes out your financial security and it hurts us all, well not necessarily all. Read on, I’ll try to explain it to you.

Where does inflation impact you? Cost of living, the buying power of your investments/money, the buying power of your pensions in retirement, the costs to companies of inflation-proofing your pensions, the buying power of your income, the need for staff to have extra income, and because of that, the inevitable collapse of companies, which creates unemployment and a negative feedback loop that creates extra borrowing for governments, and the potentially inevitable increase in interest rates (more cost and of course inflation).

I’m sure you get my drift – its important. One upside: Debt is reduced by inflation. For example, 10 per cent per year inflation, eradicates your debt in 10 years. The country, and you, might be bankrupt, however.

The largest drivers of inflation were not as pointed out by the corporation sponsored politicians (strong wage demands, quantitative easing). Primarily you have a simple supply/ demand issue in many key areas that will drive it. Then you have profiteering. More on that shortly and over the next couple of weeks.

Four issues started it, mostly supply related (yet the Bank of England actions are around hiking interest rates to reduce demand): Zero covid policies in China; restriction of supplies due to sanctions against Russia (subsequently energy), shipping costs, profiteering.

It doesn’t go unnoticed in my ‘readings’ that it’s frowned upon to question the troubles in the Ukraine (or ‘Russia’s war in the Ukraine’) as is constantly titled in mainstream media. Don’t say anything that impacts that narrative or undermines it. But let’s consider the above key points and ask why are we not talking about all our costs going up because a UK PM blocked an agreed ceasefire that is well known, but not talked about.

Consider that Russia is (was) a major gas exporter as well as a large oil exporter. It was also the largest agricultural exporter in the world. You can see where I am going, I’m sure. The sanctions against Russia were random and randomly supported. Many western nations half applied them as they couldn’t afford to. Many large nations sided with Russia.

The outcome of sanctions is vastly increased food and energy costs - although I can still eat in many other western countries for a fraction of UK or Ireland costs.

Headline: Food inflation dropped from 19 per cent in April to 18.3 per cent in May – party on! Amazingly, the cost of food in supermarkets rose by 0.9 per cent in May alone.

The UK’s inflation is 45 per cent higher than France, 38 per cent higher than Germany, and over 22 per cent higher than the EU as a whole. Read into that what you may, but there is poor confidence in the UK, and although rates are rising, sterling is falling (it should rise as an attractive place to put money as rates are rising) primarily because the UK is likely to hit a recession giving us the stagflation I talked about last year.

A falling currency means the UK’s inflation will rise further as it is a net importer and imports become more expensive – long sigh.

Looking at the other impacts, container ships’ costs have plummeted. Over 80 per cent of our goods are shipped around the world. The cost of container ships have absolutely nosedived from their obscene prices. For example, the cost of a container from China to the west of the US is down 93 per cent.

China’s zero-covid policy: The one small Chinese factory-made ‘bolt’ required to finish a larger project elsewhere meant that when an outbreak in covid shut factories, those bolts didn’t arrive, the bigger project stopped, the demand remained the same, the cost had to rise. That zero covid policy has been over for a while.

And so to profiteering. The detail will have to wait to next week given its content, but we know there wasn’t a shortage of gas or oil in early 2022. In the meantime, prices rocketed, and they rocketed to record levels.

Shell announced the highest profits in its history. Exxon, another record, announced a profit of $6.3m an hour (which sounds a lot). But we can’t talk about that, as a cause of inflation!

We can agree that the outcome is that we have inflation that isn’t associated with economic growth but is battering families and businesses to bits because of government policies that support other asset inflation which doesn’t work for the ‘non one per cent’.

I will get to what you can do about it – bear with me.

Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a financial question call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit www.wwfp.net