The Future of Inflation in the UK: Will We See Higher Rates Than 20%?
Introduction
It is almost certain that inflation in the UK will surpass 20% within the next few years. This article explores the potential reasons for this, the current state of the UK economy, and the necessary precautions individuals should take to protect themselves from the adverse effects of inflation.
Quantitative Easing and Its Impact on Inflation
The Bank of England's practice of creating additional money through quantitative easing (QE) creates an environment conducive to inflation. In the financial year 2020/21, the Bank of England created 10 extra pounds out of thin air. A year later, inflation was recorded at around 10%. This cycle of money printing ultimately leads to higher inflation rates.
As the government continues to face financial challenges, expect them to print even more money in the next crisis or recession. This has happened in other countries like Lebanon, Turkey, Zimbabwe, and Weimar Germany. Rapid money printing can cause rampant inflation, eroding the value of savings over time.
Current Inflation Rates and its Impact
Despite not reaching 20%, inflation in the UK is expected to rise to around 10% by the end of 2022. This rate has not been seen since 1990, marking a significant shift in the purchasing power of savings. At a rate of 10% inflation annually, savings will lose half their value in just nine years. Additionally, interest rates on savings and pension investments will not keep up, leading to a substantial decrease in overall wealth.
Domestic energy and food prices are driving the current inflation rates. On April 1, 2022, Ofgem increased variable gas and electricity tariffs by 54%. By October 1, 2022, another 32% increase is predicted, potentially raising the typical household energy bill to ￡50 per week or ￡2600 per year.
Government Response and Other Factors
The UK government is addressing inflation through the welfare and tax system by providing modest financial assistance. However, almost all households will be worse off. Those with mortgages can also expect additional financial stress as the Bank of England prepares to increase interest rates.
There is a remote possibility that inflation rates could rise even higher, but this scenario is highly unlikely. If the war in Ukraine escalates into a non-nuclear world war and urgent measures are not taken, the impact on prices could be significant. A nuclear war would make discussions about price changes insignificant in comparison.
Protecting Yourself from Inflation
In light of these potential economic challenges, it is crucial for individuals to take precautionary measures to protect their savings and overall financial stability. Consider diversifying your investments, maintaining emergency funds, and staying informed about financial market trends to navigate the uncertain economic landscape.
Remaining vigilant and proactive in managing personal finances will help mitigate the adverse effects of inflation and protect your financial security.