…something fizzy, which seemed rather incorrect / the real effects of inflation

01 August 2021

For those of us above the age of 40 or so, you may remember that August each year used to see the launch of the year's only new car registration number. The first day of August would get rather hectic for local car dealers, some opening at 12.01am to welcome in the new car buyers, usually with a glass of something fizzy, which seemed rather peculiar at that time in the morning.

Now, with two new car registration launches each year to spread the workload and the peaks in demand, the spectacle seems rather more muted than in the pre-2001 days, some 20 years ago.

After the scandals of exhaust emissions, cars have become more efficient, invariably greener, and of course more expensive.As an example, and not exact, a Vauxhall Astra hatchback car would have cost £1,673 on average back in 2001, and in 2021, £15,589, close on a 93% increase in 20 years (source: desperateseller.co.uk). This might suggest an inflation rate of 4.65% each year, ahead of the headline inflation rate in all the years in the period considered.

This is only an example of a real cost increase, noting that inflation of those 20 years was not historically at its past peaks (see the mid-1970's to very early 1990's for real inflation volatility). However, this illustration highlights in part the real effects of inflation and the real purchasing power of the capital you hold.

I have always indicated to clients that the headline inflation rate you see detailed nationally may not reflect the often-higher increases that you see in the shops, stores, or indeed on the forecourt. One key point is that one of the things that may about to get a bit 'fizzy' is inflation as it begins to rise above the current Bank of England target of 2.0%. With deposit returns invariably below 1.0% pa gross AER, and inflation running at 2.4% pa (Source: ONS CPIH / Consumer Prices Index Household June 2021), it is not difficult to understand that some deposit and cash savings are losing real purchasing power. However, we are advocates of maintaining an emergency deposit fund of 3-6 months' income in case of unforeseen needs. It is also important to remember the deposit protection limit for current/ savings accounts of £85,000 per person per provider.

The issue here is what will the Bank of England do to control inflation, as they normally prefer to do? They may wait to confirm that the upward inflationary pressure is real, and then one easy tool in their bag of economic instruments is to increase base rates, currently at a historic low of 0.10%. So, there is lots of scope to push this rate up, noting that the last time the Bank of England base rate was above 5% was 2008, plummeting with the last recession in late 2008. It's been 12+ years since we saw the UK base rate this high, and if it returned to this level, savers might be in for a pleasant surprise, and variable rate mortgage holders, and those coming to the end of a fixed rate loan, might be in for a shock.

So, if inflation does become upwardly 'fizzy', is this incorrect? Probably not and this might be a good time to think forward to possible economic change in your own household economy.

Keith Churchouse FPFS

Director

CFP Chartered FCSI

Chartered Financial Planner

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