For the first time in four years, inflation has now fallen to the governments 2% target. This was welcome news for the many people who have experienced low (if any) pay rises, coupled with the well publicised rising cost of living. Sadly, the current low rate of inflation has the potential to come to an end before it has even really started.
With the base rate currently set at an historic low and the price of property now rising again faster than people can keep up with, it only seems a matter of time before inflationary pressure returns to the market. Halifax today reported that average property prices rose 7.5% in the 12 months ending in December and that trend looks set to continue. Businesses are reporting record profits just days into the new years reporting season and already there is talk in the media of 3% average pay rises this year.
What this all adds up to is consumers feeling more confident, after all, their property value is now back on the stairway to heaven, they will finally be getting that pay-rise they have been waiting 5 years for and even the good old BBC seems to think the economy is ok. What could possibly go wrong? Well, more confident consumers will likely spend more which in turn will have the impact of increasing prices once again, just as they started to get back under control.
My fear is that perhaps we are a little too confident. Our economic recovery is still in it’s infancy and that base rate will have to increase one day. The risk is that inflation will spike “too soon” triggering a rise in interest rates that will bring the country back to earth with a bump when it realises that it does actually cost money to borrow money.
As always, a well-diversified portfolio of asset-backed investments stands the best chance of beating the rate of inflation over the long term. Clients may wish to consider a review of their investments now, before inflation starts to pick up again.
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