Inflation in the UK hit heights of 11.1% in October last year, creating a big strain on our purse strings. However, this has fallen to 6.7% in August and September this year. See figures underlined in orange below:
The Bank of England say they expect inflation to fall further in the coming months, with predictions of a rate of around 5% by the end of the year.
They also expect inflation to continue to fall in 2024, reaching the target rate of 2% in the first half of 2025.
It is important to note here that a fall in inflation (disinflation) does not mean goods and services are getting cheaper (which would be deflation). It simply means that the rate of inflation is decreasing, so costs are still rising, it’s just happening more slowly.
Food Costs
The rate of inflation for food and non-alcoholic beverages is much higher than the average overall inflation rate. This is because the inflation rate is an average, and the prices of different goods and services rise at different rates.
48% of Great British adults say they have spent more than usual to get their usual food shop within the last two weeks.
However, the inflation rate for food and non-alcoholic beverages has eased to 12.2% in September this year, acting as a decrease from 13.6% in August and from highs of 19.2% in March.
Why is Inflation Falling?
One key reason why the Bank of England expect continued disinflation is that energy bills should reduce more due to recent falls in gas prices.
They have also stated that higher interest rates will help bring down inflation further. This is because higher interest rates discourage spending by decreasing the cost of borrowing and increasing the reward of saving money.
What About Wages?
In June to August 2023, annual growth in regular pay for the public sector was 6.8%, acting as one of the highest regular annual growth rates since 2001. However, this rise was 8% the private sector, meaning there remains a gap between public and private wage increases.
Importantly, data from The Office of National Statistics (ONS) shows a positive annual growth rate in real pay for August 2023 (real pay accounts for inflation). This is certainly much needed to help reduce some of the pressure on household budgets among the continued cost-of-living crisis.
The International Monetary Fund (IMF) has upgraded the UK’s economic growth forecast earlier this week, with predictions that the UK economy will contract by 0.3% rather than 0.6% as previously forecasted. However, this contraction still sees the UK settling into its position as the worst performing G7 economy this year.
Here you can see that the IMF predict 0.3% negative real GDP growth alongside a 6.8% inflation rate in the UK for 2023.
The rate of inflation is certainly heading in the right direction when compared to its rate of 9.1% last year. Nevertheless, this is still far higher than the Bank of England’s 2% target rate of inflation.
The above graph, taken from BBC News, using IMF data, shows UK growth forecasts in 2023 and 2024 in comparison with other G7 countries.
This graph clearly illustrates that the UK is facing a very different situation to its companions, acting as the only G7 nation with negative growth for 2023.
This said, it does also appear that we are on the right path, as despite predictions of a 0.3% contraction in GDP this year, the IMF also forecasts that we will move away from this shrinkage and into growth of 0.9% in 2024.
Given that the IMF has reduced how much they expect our economy to contract this year and increased the growth they predict us to experience next year, we can certainly see an increasing optimism in the UK’s economic outlook.
The Mini-Budget’s Aftermath
One of the reasons for the decline in the UK’s economic environment is the continued aftershocks of Kwarteng’s September mini-budget under Truss’ leadership.
“In the UK, investor concerns about the fiscal and inflation outlook after the announcement of large debt-financed tax cuts and fiscal measures to deal with high energy prices weighed heavily on market sentiment in late September. Amid high market volatility, the British pound depreciated abruptly, while yields on UK sovereign bonds rose sharply. The scale and speed of yield increases, especially at the long end of the curve, reportedly had a significant impact on levered positions held by UK institutional investors, particularly pension funds”
The fiscal policy proposed in the September mini-budget worked to counteract the Bank of England’s monetary policy. This is because Kwarteng proposed unfunded tax cuts in a somewhat frenzied attempt to stimulate economic growth, whilst the Bank of England sought to stabilise inflation through interest rate rises (which of course have the opposite effect on growth).
If we combine the aftermath of the mini-budget with continued high energy prices, rising mortgage costs and continued labour shortages, the IMF’s forecast comes as little surprise.
To look at the IMF’s World Economic Outlook for the UK in more detail, click here.
by Red Star Wealth
The National Education Union (NEU) has recommended that their members reject the government’s proposed pay increase.
What do Teachers Want?
The above graph, courtesy of The Institute for Fiscal Studies, shows real-term pay cuts of teachers from 2010 to 2022, ranging from 5% real-term reductions for new teachers to 13% for more experienced and senior teachers.
Because of this, unions are calling for above-inflation government-funded pay increases, as opposed to pay rises created from re-allocation of school budgets.
The Government’s Offer
The Government has proposed a one-off payment of £1,000 for the current 2022/23 school year and a 4.3% consolidated pay rise for most teachers for the 2023/24 school year.
The Department for Education has described this proposed pay increase as “a fair and reasonable offer.”
NEU Response
The NEU has noted that this proposed pay increase sits below inflation projections so actually represents another pay cut in real terms for teachers.
Co-leaders of the NEU, Mary Bousted and Kevin Courtney, said:
“This is an insulting offer from a Government which simply does not value teachers. This offer is less than teachers in Scotland and Wales have been offered. It does nothing to address the long-term decline in teacher pay and therefore does nothing to solve the problems in teacher recruitment and retention.”
If teachers do not accept this pay offer, it is possible that industrial action could occur on exam days as a last resort.
NEU analysis also suggests that up to 58% of schools would be forced to make cuts in order to afford these staff pay rises, putting them under even more financial pressure. This goes against what Unions are calling for, as they want pay increases to be government-funded, rather than them coming from schools’ budgets.
Therefore, NEU has put this offer to their members, recommending rejection. The ballot will close on Sunday 2nd April at the end of this week.
by Red Star Wealth
According to The Money and Pensions Service’s Financial Capability Survey, 11.5 million UK adults have less than £100 in savings and only 49% of people could last 3 months or more without borrowing money if they lost their main source of income.
Why Might You Struggle to Save?
It’s difficult to save money if you have any debts because you are tied into making repayments.
It’s also difficult to save when you don’t have a budget plan as it’s harder to keep track of your money. Budgeting can help you see where you might be able to reduce your spending and where (if possible) you can afford to put money into savings. Use our free budget calculator through our sister company’s website if you need some help making your budget!
It’s hard to save money if you have a habit of overspending. It can be easy to spend beyond our disposable income, especially at times like Christmas…
The Cost of Living Crisis
UK savings will likely only decrease in continuing months. This is because many people cannot afford to save money at the moment, giving the huge inflationary pressure on living expenses.
You can only afford to save money when your expenses are more than your income. Therefore, many people might see their savings slowly being depleted, the growth of their savings coming to a standstill, or their savings’ growth slowing down.
Why is Saving Money so Important?
It enables you to achieve your financial goals
You can form an emergency fund for any unexpected expenses. This in turn gives you security and peace of mind as the emergency fund acts as a safety net so that you can afford to cope with the unexpected
It can help you avoid taking out credit, protecting you from entering a cycle of debt. This point is particularly true when considering how many people turn to things like payday loans when they have unexpected bills
It means you can accumulate wealth, which is good if you want to do something like channel money into an investment
It helps protect your credit score as you can make payments on time
If saving for a house, it means you can put down a bigger deposit, meaning you will have a smaller mortgage with more competitive interest rates
We know that it can be really difficult to save money when the price of everything constantly seems to be on the increase. Sometimes saving is not a viable option, as you may simply not have any spare cash to put away. However, if you are able to, building your savings is certainly worth considering…
by Red Star Wealth
We all hear the word ‘inflation’ so much that you’re probably sick of it. However, stagflation seems to be a topic less talked about. With the risk of stagflation having increased in the UK, we think it’s important to have a quick rundown of what this actually means
The Different Types of ‘-flation‘
Inflation- a general rise in prices, meaning you get less for your money
Disinflation- a fall in the rate of inflation. Prices are still rising but at a slower rate
Deflation- a general fall in prices
Stagflation-persistent high inflation, coinciding with high unemployment and slow economic growth. It is a combination of both ‘stagnation’ (slow growth, no wage increases and high unemployment) and ‘inflation’
Stagflation is a Rareity
Until the 1970s, most economists shared the belief that inflation and unemployment have an inverse relationship. This means that when inflation increases, unemployment tends to decrease. However, we now know this is no longer the case
What Happened in the ’70s?
We haven’t faced stagflation since the 1970s. This economic situation was caused by the oil crisis acting as a supply shock
The oil crisis meant the UK and US could no longer import oil from the Middle East. Continued strong demand with a huge restriction on supply meant that oil prices shot up by a whopping 300%
Demand and supply diagram by Red Star Wealth
As shown by the above diagram, when supply restricts, prices are pushed up
What Causes Stagflation?
Supply-side shocks, such as labour shortages or the example of the 1970s oil crisis
Certain fiscal and monetary policies, e.g, government spending being too high, or interest rates being too low
What Would it Mean for Us?
Stagflation would hit the average UK household hard; it would mean people’s wages weren’t keeping up with the price increases of goods and services
It would essentially be a worsening of the current cost-of-living crisis
Once it starts, it is difficult to reverse
Managing inflation involves a reduction of the flow of money to reduce inflationary pressures caused by high demand. For example, the recent government decision to raise the interest rate to 1.75% is a way of trying to counter inflation
On the other hand, managing a recession usually involves an influx of money into the economy to kickstart economic activity and encourage spending. Part of this could be lowering the interest rate
Given that stagflation is a combination of both of these, it is very difficult to solve, as these are two completely opposite approaches
Stagflation can be dealt with by dealing with the supply-side shock that caused it as quickly as possible. Then, action should be taken to reduce inflation before dealing with the stagnation aspect
Will we enter a period of stagflation?
In its latest Financial Stability Report, The Bank of England has said the outlook of the UK economy “is subject to considerable uncertainty”. Click here to read the full report.
As discussed in one our previous blogs, inflation is estimated to reach 13% later this year, meeting the first condition of stagflation
However, the UK’s GDP actually rose by 0.5% over the 3 months preceding April this year. This said, this growth could certainly end up being negated if there is a drop later this year caused by the cost-of-living crisis reducing spending. Additionally, whilst our unemployment rate is actually low, there are still labour shortages caused by Brexit and Covid reducing the size of our labour force
However…
The average inflation of Great Britain in 1975 was an enormous 24.11% so we aren’t in the same boat yet
We can’t predict for certain exactly what will happen to the economy. At the end of the day, we aren’t psychics or oracles! All that this info means is that the risk of stagnation has increased, not that it is inevitable and unavoidable
by Red Star Wealth
With the cost of living constantly increasing, it can be difficult to understand why the Bank of England has chosen to increase interest rates. Why increase the rate of interest when this will make mortgages more expensive? Join us as we investigate why this is the case
What is inflation?
Inflation is when an economy’s goods and services see a general increase in price. The rate of inflation is a measure of the speed of this increase; a higher rate of inflation means prices are generally increasing quicker
Inflation reduces the purchasing power of consumers’ money. In a nutshell, they get less “bang for their buck”
What is disinflation?
Disinflation is when the rate of inflation is reduced. This is the current aim of the Bank of England. In order to keep inflation stable, they aim to keep it at a rate of 2%
Source: Office for National Statistics
The CPIH is the Consumer Price Index, taking into account housing costs
As you can see from the above figure, inflation is currently far above this target. In fact, the Bank of England has predicted that the rate of inflation may reach over 13% this year
For those who wish to look further into the changing inflation rate over the years, we recommend checking out the Office of National Statistics
Measures must be taken to reduce this inflationary pressure… this is where the increased interest rate comes into play
The effect of interest rates on inflation
By increasing interest rates, the Bank of England is aiming to discourage consumer borrowing and encourage consumer spending. By saving more and thus spending less, the idea is that there will be less inflationary pressure stemming from consumer demand
On the 16th June 2022, the Bank of England’s base rate of interest rose from 1% to 1.25%. As of the 4thAugust 2022, this has increased to 1.75%, serving as the biggest rise in the last 15 years
What does an increased interest rate mean for you?
Mortgage rates will increase for any homeowners that aren’t on fixed rate deals
You will have a higher rate of interest on your savings, meaning more money in the account. However, inflation is still eating away at the purchasing power of money so it is still reducing in value
You will have a higher payments for money borrowed on credit cards or loans
One of the main drivers of inflation is the increase in price of wholesale gas prices, of which higher interest rates will not bring down
A recession?
A recession is when there is a prolonged downturn in economic activity for two or more consecutive quarters (each quarter being 3 months long)
The Bank of England has warned that we are likely to enter a recession later this year, which is predicted to last as long as 5 quarters
Whilst this all seems like a very grim outlook, there are ways of dealing with these difficult times. Check out this blog for help in managing your finances during a recession
