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If the International Monetary Fund (IMF) is right, the UK will continue to have the highest inflation of the G7 nations, averaging 3.4 per cent this year and 2.5 per cent in 2026. That may be too optimistic, for next week we get the September numbers and they are expected to show that the Consumer Prices Index (CPI) will rise to 4 per cent, up from 3.8 per cent in August.
In any case, the CPI underestimates the real impact of inflation. The Government’s preferred measure, the CPIH, which includes owner-occupied housing costs, was already at 4.1 per cent. That affects a huge number of people, nearly two-thirds of the country. And the old Retail Prices Index is higher still: 4.6 per cent.
We have now become an outlier. Inflation is under reasonable control across most the developed world, with the eurozone at 2.2 per cent in August and the US – despite the impact of tariffs – at 2.9 per cent. Here, we hope that next week’s figures will signal the peak, but we can’t be sure of that at all.
When the numbers come out next Wednesday there will inevitably be anger at the Government and the Bank of England. But we have to live in the world as it is, not as we might wish it to be. So what should we do to combat – or at least live with – rising inflation?
There are some things we can’t do anything about. For example, council taxes are set to rise by an average of 5 per cent – they are, by the way, one of the big elements in the CPIH measure of inflation. But there are others where small changes in our habits can help hold down our personal inflation rate, and the best way to get a grip on that is to see which items have been shooting up in price and which have been under better control.
For example, over the year to August food was up 5.1 per cent and alcohol and tobacco up 5.9 per cent. Clothing and footwear on the other hand were up only 0.2 per cent, so barely at all. Furniture wasn’t too bad either, up 0.8 per cent, whereas housing was 7.4 per cent higher, and communications (all those mobile phone contracts) 6.1 per cent. Education, pushed up by the imposition of VAT on private schools, was up 7.5 per cent overall, so affecting some people hugely and others not at all.
The point here is not to tell anyone how to live their lives but rather to show where inflation is really racing away and therefore where shoppers should be particularly sensitive to price increases. We sort of know this, but it takes discipline to crack down on unnecessary spending without going to hair-shirt mode. There are deals around on all sorts of things, including energy and travel, because businesses are under huge pressure from rising costs and desperate to grab some market share wherever they can. But it does take time and energy to take advantage of these.
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There is something else. Inflation affects our spending, but it also affects our saving. Over the long run, the latter is probably a more important shaper of our wealth and well-being. We tend to forget how inflation savages our savings. This most recent bout of inflation is at the top of our minds but it has been eating away at the value of money every year of our lives.
To look at how inflation has eroded the value of money in recent years, you would now need nearly £200 to buy goods and services worth £100 when Tony Blair took office in 1997. So prices have doubled since then. They are up more than 50 per cent since the coalition won the election in 2010, and up 30 per cent since Boris Johnson took office in 2019.
Of course savings in a bank or building society do pay some interest, but by the time you have paid tax on that you are probably still losing money. On the other hand, money invested in equity markets has over a long period always done better than inflation. And as we all know, residential property in the UK has also beaten inflation over the past century too.
So coping with inflation is not only about holding down day-to-day costs. It is also about protecting our savings from being eaten away. That’s a huge challenge, but one all of us have to face.
Need to know
The thing to realise about inflation is that the period since the Second World War has been utterly different from anything in the previous 800 years – as the Bank of England’s inflation calculator shows us.
Between 1209 and 1509 there was hardly any inflation at all, for you needed only £15 then to buy those £10 of goods 300 years earlier. Then during the 16th century there was a burst of inflation with the discovery of gold and silver in the Americas, so you would need over £80 by 1609. Then there was another period of creeping inflation with £114 by 1709, and £250 in 1809.
Then – and this is really astounding – prices fell for a century. By 1909 you only needed £171! So people received much of their rising higher living standards from falling prices, rather than rising wages.
The first half of the last century saw prices go up five-fold – it was £870 by 1959 – and then we had the greatest surge of inflation ever, so that by 2009 it needed over £11,000 to buy that £10 worth of goods in 1209.
My point here is someone who has lived through the second half of the last century will have experienced something that nobody in England had done in the previous 800 years. So £10 when I was born in 1943 would be worth nearly £400 now. My starting salary of about £950 a year on the Liverpool Post in 1966 would be equivalent to £15,000 today.
So now ask two questions. One is what do you think might happen in the next 50 years. Could we experience another burst of inflation similar to the past 50 years? The other is, if that were to happen, would we trust fiat currencies at all?
The soaring price of gold says a lot of smart money is saying yes to the first question, and no to the second. Actually, I think gold is over-valued at the moment, and I think the world’s central banks will eventually get some sort of control over inflation. But it is impossible to be confident, given the soaring debts of governments around the world, including our own one. Sorry about that.
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