UK inflation has soared to 9% in the 12 months to April, its highest mark in 40 years, as energy prices surge higher and weigh on consumers’ pockets.
An increase in prices comes as a result of an unprecedented £700-a-year surge in energy expenses in April. Russia’s invasion of Ukraine led to a sharp jump in fuel and food prices in the UK and many expect inflation to continue rising in 2022.
Q1 2022 hedge fund letters, conferences and more
Data by the Office for National Statistics (ONS) showed that roughly 75% of the inflation surge in April happened due to an increase in electricity and gas prices. The data also noted a higher energy price cap in April, which forced households that are spending a typical amount of gas and electricity to pay an average of £1,971 a year.
While households of all incomes have grappled with similar inflation rates, it now appears that higher prices are leaving the biggest impact on poorer households as they are forced to spend the majority of their income on gas and electricity, according to the Institute for Fiscal Studies (IFS).
Rising food, machinery, and furniture costs also surged last month, the ONS data showed. Moreover, all items available on restaurant and cafe menus have gone up in price as well as the VAT rate for hospitality is now back at 20% again after being reduced during the coronavirus pandemic.
Average petrol prices hit a new record high of £1.62 per liter in April, up from £1.26 per liter a year ago.
UK’s Highest Inflation Since 1982
Inflation, which represents the rate at which the price of goods and services is rising, currently stands at its highest level since 1982, according to ONS estimates.
Earlier in May, the Bank of England said that surging costs could push the UK closer to a recession as inflation could potentially rise to more than 10% later this year due to even higher energy bills.
Andrew Bailey, Governor of the Bank of England, said the possibility of further price increases represents a “major worry” for the country as the war in Ukraine continues to weigh on food supplies.
Bailey defended the Bank after it was criticized for not trying enough to control the price rises. He also said that higher prices of global goods would dent the economy of the UK and other countries as well as drive unemployment.
The governor noted that global supplies of wheat and cooking oil could also be affected as it becomes increasingly difficult to ship out food supplies from Ukraine.
"There's a lot of uncertainty around this situation," Bailey said.
"And that is a major, major worry and it's not just I have to tell you a major worry for this country. There's a major worry for the developing world as well. And so if I had to sort of, sorry for being apocalyptic for a moment, but that is a major concern."
An increase in food and energy prices would have a significantly higher impact than any interest rate hike, Bailey added.
Where to Hide?
Inflation reflects at what rate cash becomes less valuable and many are looking to increase the value of their capital through investing.
A common way to deal with inflation for investors is tracking a benchmark of inflation-linked bonds, which are linked to the costs of goods and services measured by indexes such as the consumer price index (CPI) or retail price index (RPI). Investors who prefer a more passive method could track inflation through funds.
However, investors should be aware that buying funds is not a good strategy for everyone and that’s why it is important to first establish your goals and attitude toward risk before committing to any serious investment moves. Just like any other asset class, funds can also rise and fall in value and hurt investors’ profits.
As a result, having a diversified portfolio that includes a wide range of investment bets like stocks and bonds is a good long-term strategy for the majority of investors amid the period of rising inflation. Further, the majority of the best apps for trading stocks in the UK offer access to the US equities market, bringing investors a wide variety of available options.
When it comes to more alternative investments, many traders have also considered cryptocurrencies such as Bitcoin as a hedge against inflation. However, the recent performance of the world’s largest digital asset won’t help this theory to thrive.
The term transitory inflation has become trendy over the past few months and it essentially suggests that a period of high inflation will be short and tough. Those who believe that the current inflation is ‘transitory’, think that the recent price spikes are not here to stay and that they would eventually return to the target rate of 2% in the UK.
Once the inflation returns to the levels targeted by BoE, investors are likely to increase their exposure to growth-focused parts of the market, such as the tech sector.
The US, on the other hand, has a different target rate, with the Federal Reserve aiming for an average inflation rate of 2% over time, providing the central bank with additional flexibility to achieve its goal.
As a result, investors are advised to closely monitor inflation rates both in the US and in the UK as price spikes can affect the outlook of the economy and companies they want to invest in.
Conclusion
The UK Consumer Prices Index rose by 7.8% in the 12 months to April 2022, up from 6.2% in March, according to the ONS data. This marks the highest level since 1982 with BoE Governor Bailey seeing "a lot of uncertainty around this situation." Overall, UK investors are likely to look for stable, high-quality assets to hide from the rising inflation and hawkish BoE.
Get Smarter on Crypto and Macro. Get the 5-minute newsletter that keeps investors in the loop. Five Minute Finance is an independently run newsletter covering the latest and most important trends in crypto, macro, and global markets.
