Inflation is finally below the Government’s 2% target, but it’s unlikely to last long.
After years of rapidly rising prices, inflation now stands at its lowest point for three and a half years.
The Consumer Price Index (CPI) fell sharply last month from 2.2% to 1.7%, marking the first time since April 2021 that inflation sat below the Government’s official 2% target.
While this is obviously welcome news following years in which household budgets have been hammered by sky-high price rises, the bad news is inflation could soon start rising again.
In fact, financial firm DeVere Group has warned it is “an imminent reality”.
The decision by the Bank of England to cut the Base Rate by 0.25% last week will obviously have some upward inflationary impact, but there are broader political and economic issues that are likely to drive inflation longer term.
3 reasons why inflation will return
The first factor is the election victory of Donald Trump.
As we explained in this article, the President elect is likely to introduce or increase tariffs, which, along with various other measures he’s likely to enact, will inevitably drive up prices.
Elsewhere, the new chancellor’s Budget plans are also likely to drive up prices as a result of increased taxes and Government spending.
In fact, the Bank of England recently speculated that the measures announced in Rachel Reeve’s Budget would increase inflation by up to 0.5% over the next two years.
The final inflationary factor at play is the ongoing tensions in the Middle East, which will likely keep oil prices high.
Add these three together and it can only mean one thing.
“Inflation isn’t a hypothetical threat; it’s an imminent reality,” said Nigel Green, CEO of deVere Group.
“The erosion of cash’s purchasing power is a near certainty in this environment.”
“Trump’s return to power in the US signals a likely surge in inflationary pressure.
“His economic agenda includes substantial spending on infrastructure and other projects, which could inject considerable capital into the economy, driving up demand and, in turn, prices.
“In the UK, Labour’s victory brings with it a mandate for increased public spending, especially in sectors like housing, green energy, and public services.
“While this could stimulate growth, it also poses a risk of further inflation, especially if wages rise and spending increases without corresponding productivity gains.
“Middle Eastern wars and geopolitical tensions could also affect supply chains.
“Should this scenario play out, it would send ripples across economies worldwide, raising transportation, manufacturing, and utility costs, and driving up prices for consumers.”
What this means for your finances
Rising inflation is obviously a concern given the ongoing cost of living crisis that has hammered household budgets.
It’s important to note that analysts do not expect to see inflation rising to anywhere near the levels seen in 2022 and 2023 and will instead be far more moderate.
One of the big knock-on effects of rising inflation is that the pace of Base Rate cuts will likely be slowed – something the Bank of England has already acknowledged.
That means borrowing costs will stay higher for longer, while savings rates are likely to be reduced at a slower rate.
What should you do in response?
With the rate of price rises set to increase, it’s important you ensure your money doesn’t start losing value in real terms.
The good news is the best savings rates are currently far higher than inflation, so it should be easy to protect your money in the short to medium term at least.
As a case in point, you can earn up to 4.8% on a one-year bond and 4.6% on a three-year bond, while inflation currently stands at 1.7%.
If you’re looking to protect your money longer term, perhaps five years or more, and are comfortable with taking on some risk, then you could consider investing your money.
As DeVere Group explains, you could specifically consider putting your funds in assets that have a track record of performing well in inflationary periods.
“Equities, particularly in sectors such as energy, infrastructure, and green tech, are poised to benefit from Trump’s and Labour’s spending agendas,” the company said in its latest release.
“For example, infrastructure and energy companies are likely to see increased demand in the US, while renewable energy projects and green tech could experience growth in the UK under Labour’s policy shifts.
“Inflation-linked bonds, real estate, and commodities are also valuable assets for countering inflation.
“Investors who pivot towards these asset classes can not only protect but also potentially grow their wealth.”
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The information included in this article does not constitute regulated financial advice. You should seek independent, professional financial advice before making any investment decision.