What is Inflation?

Inflation is when the price of an item increases over time and the cost of living becomes more and more expensive.

Inflation will mean than the worth of a £1 decreases the more inflation goes up and this is why it becomes difficult to maintain a standard of living when prices go up overall.

High inflation means prices are rising quickly and low inflation means prices are rising slowly over time.

So despite Inflation rates falling, unfortunately your weekly shops won't cheaper, the supermarkets are experiencing a decrease in inflation and prices are still rising but slower than before.

There are many causes of inflation including rising productions costs and rising wages.

For Example…

If a carton of orange juice cost £1 and then a year later the same orange juice cost £1.05 this would be an inflation rate of 5%.

When inflation happens this means that you could have £50 to buy a new microwave, but if you wait a year to buy it you could need £60 to buy the same microwave as the prices have increased and your money needs to be stretched further.

Who is most affected by inflation?

ONS reported that those on a lower income will experience higher than average inflation rates and will be more affected by the high food and energy costs than those from a higher income household.

In a survey from February and March 2024, it was found that 46% of adults reported an increased cost of living compared to previous months.

Trussell Group food charity found they had provided 1.5, emergency food parcels in April-September of 2023 which is a record for that period,

Citizens advice reveal that in February 2024 they had helped 46,640 people with debt advice.

The government has announced that they will be increasing the cost of council tax due to the rate of inflation in the UK.

How they calculate your council tax

The cost of Council tax is determined from the valuation of the property from 1991 in England and Scotland and 2003 in Wales. If your property did not exist then it would have a valuation completed by the Valuation Office Agency (VOA). New builds will be compared to similar properties in the area.

The VOA value the property based on…

• Size
• Layout
• Character
• Location

The property will be placed in a band where Band A is the cheapest through to Band H which is the most expensive.

Council tax varies depending on each county and the needs for the area. Your local council will set the price for each band’s council tax bill.

Council needs include, street cleaning, community infrastructure, the police and fire services in your area, street lighting, rubbish collection and more.

How you pay your council tax

If you are moving into a house soon and are unsure how council tax works, there is no need to panic. Once you move into the property you will be sent a letter from the government with your council bill included along with the process to pay it. You will be sent this letter once a year in April when you expected to pay, you should then set up direct debits to ensure this is paid on time.

The payments are usually split into 10 monthly payments form April- January starting from the month you possess the property.

You can pay your bill online, or alternatively there would be pay points in your area, such as, the post office.

Extra costs of buying a house such as council tax is why it is important to understand how much of your salary should be spent on your mortgage so you can afford all the costs included in moving into a house.

Can I get a reduction?

You could be eligible for a reduction or exemption from council tax if you meet the criteria below.

• You are on a low income
• You are a student or live with t a student
• You live alone or are the only adult in the property
• You are a member of the armed forces
• You have a severe mental impairment or live with someone who does
• You have moved into a care home or the hospital

We have all seen food prices rise sharply over the past two years, but there is evidence to suggest that we have seen the worst of the escalating food costs.

Many factors have caused food prices to spiral upwards since 2022, including issues over the global supply chain since the Covid-19 pandemic, and the Russian invasion of Ukraine that placed huge pressure on energy prices that led to huge knock-on effects for the cost of food.

Labour costs have also increased to cope with sky-high inflation, and the after effects of Brexit via areas such as an increased paperwork load are thought to have created higher costs for food retailers and producers alike.

British Retail Consortium finds March fall in food inflation

Figures complied by the British Retail Consortium (BRC) showed that there is room for optimism for consumers, as food inflation fell to 3.7% in March from 5% during February.

This is also below the three month average of a 4.8% increase in food prices from the BRC‘s own data, and the drop in food prices for March was the tenth successive decline in food prices.

In the BRC’s food category inflation is now the lowest it has been since April 2022, when food bills started to soar.

Falling prices in foods such as chocolate, jam and sugar have helped to slowdown the rises in food prices, according the BRC’s chief executive Helen Dickinson.

This is despite high global cocoa, dairy and sugar prices, as retailers have rallied to give consumers some “cracking deals” Dickinson said.

Supermarket competition has been the driving force behind falling prices consumer research group Nielsen IQ found, as they increased the amount of shoppers at their stores with discount deals and promotional offers for Easter and for Mother’s Day.

Official Figures also revealed food price rise cooling

Data from the Office of National Statistics (ONS) also said that there has been an easing of rising food cost inflation.

The prices of food and non-alcoholic beverages rose by 7% in the year to January, and this was an easing compared to the 8% food inflation that was found in the 12 months to December.

This matched what the BRC found in that it was the lowest food inflation that has been recorded since April two years ago.

Bread and cereals were the main drivers for the fall of annual prices in January, which fell by 1.3% on the month, and this was the biggest drop in prices in this category since May 2021.

These recent figures are far better than the peak of 19.2% food inflation for March last year, this was the highest rate ever seen for over 45 years in what was a shocking development

Yet despite the better news over recent months on food prices, overall the rise of food and non-alcoholic beverages rose by around 25% between January 2022 and January this year, again highlighting just how damaging the rise in food costs have been.

A survey carried out by the ONS in January revealed that 40% of adults across Britain said that they spend more on what they would usually buy when food shopping.

It was also found that four in ten consumers were buying less food than before, as the prices have mounted up.

For those of you who still like to go out to restaurants and cafes, there was a similar pattern and prices rose by 8.2% for the year to January compared to 7.7% in the year to December.

So how will food prices go for this year?

Most analysts expect that inflation overall will continue to fall from its current level of 3.4%, with the Bank of England stating that inflation could fall below its 2% target in spring before rising again.

Tesco have announced that price pressures on grocers have eased which has allowed prices of food to decrease. Their pre-tax profits hit £2.3bn this year with their sales rising by 4.4%, reaching £68.2bn in the year ending February 2024.

Tesco was able to make price drops on more than 4000 products by the end of the year with the average price cut at about 12%.

On the whole it’s a good indication that food price inflation should continue to drop.

One prediction from the Institute of Grocery Distribution (IGD) said that food inflation will average from 1.9% to 3.9% over the course of this year.

While by this Christmas food inflation the IGD said will be around the 0.3% to 2.3% mark, and the organisation has a well earned reputation for being accurate over the  direction of food prices.

This means that prices will still be increasing, but at a slower pace than what has been found by the ONS in the years to both January and December.

It’s a welcome trend that will be a relief to many after the ever spiralling rises of the past two years.

Why does Council Tax rise?

Rises are driven by the scale of the financial pressures that authorities are under.

The Council’s Network reports there will be a collective funding gap of £1.1bn over the next 2 years even after the rises in council tax.

Financial strain on the authorities

Four councils have been forced to declare effective bankruptcy including Birmingham, Woking, Slough and Thurrock. Because of this, the Independent report that they have been given special dispensation by the government to raise their council taxes by up to 10%. Thurrock plan to put the cost up by 7.99%.

When a council has gone bankrupt that area may experience some cut backs including bin days becoming more irregular and street lights being dimmed.

Councils are struggling to balance their budgets due to high inflation and high demand for care services. The government had supplied £600m extra to local government for 2024/25. With £500m of this for social care which will make a substantial difference to the local services.

The rate of inflation is effecting various areas of living for households and businesses including phone contract prices rising to the price of rental properties.

As well as the high prices creating hardship on households, the authorities are also struggling to make ends meet causing them to increase the cost of council tax.

How much are council taxes going up?

Most councils plan to raise their council taxes by the maximum of 4.99%. Band D council tax is raising to an average of £2171 which is an increase of £106 from last year or 5.1%.

According to Zoopla, the average UK rental price is currently £1,223 which is a +7.8% increase over the last year.

Are rental prices rising higher than the growth of wages?

The Guardian have reported that there is an expected further 13% increase in rental prices by 2027. The Office for Budget Responsibility have found there is only a predicted 7.5% increase in wages for the average worker over that same time period.

The affordability of rental homes will become more difficult as wages don’t match the cost of homes.

The minimum wage in the UK has recently been increased, however, this is still not enough to combat the cost of living.

Why are rental prices increasing?

There are almost a 5^th (18.8%) of UK homes which are privately rented as of 2023. This mean with so many people renting the demand for property is increasing, due to the accessibility to buying a home has become more difficult for the population. Despite House prices falling, they are still too much for many to start their journey on the property ladder which leaves many still renting.

There is a short term fall in prices

The increase in rental prices is slowing and despite the +7.8% increase, this is the slowest rate of growth seen in the last 2 years showing a gradual decline.

The demand for rented homes has dropped by a 5^th over the last year as well which is causing landlords to reduce their asking prices.

Data from Rightmove shows that the average time a property is listed before either being let or placed under offer has gone from 33 days to 39. Landlords are being forced to decrease the prices and renters are saving.

Chesterton’s letting agency in London revealed there has been 41% more rental property available than in January 2023. With more property available renters can take longer to decide and also be more specific with what they want.

Rental prices are slowly falling with London experiencing the biggest inflation slowdown, currently rising at +5.1% compared to last year’s rates of +15.3%.

Despite this inflation slowdown rent is still 29% higher on average than pre-pandemic levels and this is not expected to last into the coming years.

London

London residents are paying at least 50% more for rent that anywhere else in the UK according to USwitch.

London remains the most expensive place to live and rent in the UK with the average rental prices at £2119 per month.

If you are already receiving your pension or you are keen to keep on track of your pension plan options then you might be wondering what the triple lock system means.

Triple lock pension

This is the system which maintains the rising pension payments so they stay in line with the rise of inflation and cost of living. The triple lock pension ensures that the state pension pot rises with the average earnings growth, inflation or 2.5%, whichever one is highest.

This systems allows pensioners who are relying on the state pension to be able to afford rising prices without worrying.

The BBC reports that Jeremy Hunt has promised that the triple lock system will remain apart of the conservative manifesto if they win the next election.

This promise is no surprise as pensioners are a large portion of the conservative voting demographic.

The state pension cost £110.5bn in 2022-23 which is just under half of the total government spending's on benefits.

The Office for Budget Responsibility estimates this will grow to £124bn this year.

How does this affect me?

If you are currently receiving state pension or are going to start in the near future you can feel secure knowing you state pension allowance will continue to rise in line with the cost of living prices.

This also mean that the cost of paying for these benefits is going to increase each year as more people reach retirement age than the young working population.

The new triple lock system could mean paying income tax for many pensioners. 

Budgeting can be difficult to set up and stick to especially if your monthly income is small. If you are trying to save, have noticed the rising prices or just need to cut down to decrease your monthly outgoings then these tips could help you to budget.

From the 3^rd of March we can expect a 4.9% increase in the price of rail fares across the UK.

This has been capped by the Department for Transport (DfT) to try and keep the prices as fair as they can. The increase in ‘regulated’ rail fares is linked to the annual July retail prices index (RPI) measure of Inflation, which was 9% in 2023.

Millions of commuters will feel the hit of this price increase in their everyday life and with mass cancellations and delays some are calling this an insult to the public.

The Trades Union Congress (TUC) called the rise "excessive" given "widespread cancellations and delays" across the network and called for rail to be brought back into public ownership.

Privatisation of British Rail

The ownership and operation of the railways in Britain were passed from government control into private hands, this process began in 1994 and was completed in 1997.

Now, Railway companies and stations are owned by various private companies.

What are Regulated rail fares?

Any train tickets you buy which are regulated will be affected by the increase of 4.9%.

• Season Tickets
• Anytime Day
• Off-peak
• Super Off-Peak

What are unregulated Rail Fares?

If you buy these tickets they will not be affected by the upcoming price increases.

• First-class
• Advance
• Anytime
• Off-peak Day

Saving money for the future or for emergencies is becoming increasingly difficult with prices rising and more people living pay check to pay check.

With 65% of people believing that they wouldn’t be able to last just three months without having to borrow money. The financial anxiety across the UK has made it difficult for people to seek advice and support with more people feeling a sense of loss when it comes to saving.

Research found that over 5.2 million people have to pick up a second job in order to afford the cost of living.

Around 61% of adults save money either every or most months.

How much on average do people have in savings?

As of January 2024, a survey from Finder has revealed that the average UK adult has £11,185 in savings. Despite this about 46% of people have £1000 or less in savings and 25% have £200 or less.

With 16% of adults having no savings at all this means around 8.7 million people have very little or no money to fall back on in case of emergencies.

The Financial conduct authority (FCA) state that this is mostly the younger population of 18-24 years olds have less than £1000.

According to Money and Pensions Service (MaPs), around 11.5 million people have less than £100 in their savings account.

Average savings by age group

As of January 2024, Finder reveal how much people have saved based on their age.

Generation X has 19% of people with no savings at all making them the highest amount across all generations to have no savings at all. This shows the younger generations struggling to save or unsure where to start. Those aged 74+ have 10 times more in savings than 18-24 year olds.

The average amount saved increases with age for multiple reasons, a higher salary, different motivations and urgency to save or different lifestyle expenses. As responsibilities pile up there might be a higher pressure to save for a rainy day, for retirement, a pension and to look after family.

HOW MUCH MORE PAIN IS THERE TO COME?

Investment Company Managers on Interest Rates, Inflation and Bond Markets

Expert Comment from Chris Clothier, Co-Manager of Capital Gearing Trust, Samantha Fitzpatrick, Fund Manager of Murray International Trust and Andrew Bell, Chief Executive Officer of Witan Investment Trust

With UK inflation coming in above expectations at 8.7%, the likelihood of an interest rate hike from the Bank of England has increased. The Association of Investment Companies (AIC) has gathered comments from investment company managers on the outlook for UK consumers and borrowers, and where they see investment opportunities in the current environment.

Could we be near the peak for interest rates?

Chris Clothier, Co-Manager of Capital Gearing Trust, said: “The market is forecasting a peak rate of just under 6% for Q1 2024. Leading indicators are beginning to show the labour market cooling, and the impact of interest rate rises is starting to be felt on mortgage rates as mortgage holders come to the end of their fixed terms. We expect that this will eventually depress demand which, combined with energy and food inflation moderating, will eventually control inflation.”

Samantha Fitzpatrick, Fund Manager of Murray International Trust, said: “Many central banks, including the Bank of England, have continued with planned interest rate hikes amid volatile markets in an attempt to tame inflation. We are only now seeing the huge knock-on effect on mortgage rates as previous deals are rolling off in significant numbers. This, above all else, may curtail future interest rate hikes here in the UK.”

Andrew Bell, Chief Executive Officer of Witan Investment Trust, said: “In the US, a further nudge higher cannot be ruled out, but the data is likely to make the recent pause look more justified in a month’s time. In Europe and the UK, a further quarter-point rise or two is widely assumed, but it is impossible to be precise because of the lags before higher rates impinge on sentiment. After such a long period of a near-zero cost of borrowing, small steps would be wise. No central bank wants to crash the economy and have to cut rates aggressively next year just to crown the credibility lost from failing to anticipate the surge in inflation with blame for exaggerating its persistence.

“With inflation starting to converge with official targets, greater patience can be exercised than when the gap was widening. So we expect the peak in rates to resemble Table Mountain more than the Matterhorn. It is an unspoken reality that the government debt mountain will have to be eroded by inflation – not the destabilising rates of the past year but likely higher than official 2% targets.”

Is inflation calming down?

Andrew Bell, Chief Executive Officer of Witan Investment Trust, said: “Yes, most obviously in the US, which tightened first and most aggressively, together with a strengthening dollar in 2022. Energy prices there have fallen and rental inflation is also set to fall, lagging the declines in rent seen in newer contracts. In Europe and the UK, inflation is proving stickier but rates are still rising and the effect of past rises has yet to be fully felt. In the UK, particularly, the greater use of fixed rate mortgages has blunted, but only delayed, the effect of rapid rises over the past year. Having seen several disappointing inflation numbers in recent months, investors may be guilty of extrapolating the disappointment, ignoring the possibility that the numbers will start to match, or undershoot, forecasts.”

Samantha Fitzpatrick, Fund Manager of Murray International Trust, said: “Headline inflation is already falling sharply almost everywhere and should continue to decline over 2023 due to energy base effects. However, core inflation remains elevated, including here in the UK. It also needs to be remembered that even a lower positive number still means prices are rising, not falling, or even staying the same, so inflationary pressures will not disappear anytime soon.”

Chris Clothier, Co-Manager of Capital Gearing Trust, said: “We expect inflation to come down later this year, but at a slower pace than markets or the Bank had initially expected. A combination of supply and demand-side factors has served to keep inflation elevated. On one hand, supply-side factors such as tight labour markets and the prolonged impact of shocks from food and energy have kept input costs elevated. On the demand side, continued wage increases and longer fixed terms on mortgages have kept household spending elevated for longer. This experience of more protracted inflationary episodes is in line with historical experience: a study by Research Affiliates of OECD countries since 1970 showed that, once inflation has gone through a 6% peak on average it took seven years to fall back to 3%.”

Where are you seeing investment opportunities in the current circumstances?

Chris Clothier, Co-Manager of Capital Gearing Trust, said: “The bond market is replete with opportunities not seen for 15 years. We are attracted to UK Treasury Bills yielding more than 5%, short-dated investment grade corporate credit yielding between 6.0% and 7.5% and five-year UK index linked gilts offering real yields of 0.9%.”

Samantha Fitzpatrick, Fund Manager of Murray International Trust, said: “At Murray International Trust, the soaring cost of borrowing led to £60 million of debt being repaid at the end of May this year. Our approach to gearing remains unchanged, in that it should always be driven by opportunity – can we make money on the debt? We are fortunate to be able to pick and choose what debt we decide to have in these uncertain times.”

Andrew Bell, Chief Executive Officer of Witan Investment Trust, said: “Bond yields have risen from risible to visible and now offer a positive real yield based on long-term inflation forecasts. They can now just about fulfil their role as portfolio diversifiers and preservers of value but that is about it. In Western economies, long bond yields are lower than short-term yields, suggesting that the bond markets think rates will need to be cut in the next year. If central banks avoid overkill (and stop steering policy using the rear-view mirror) growth should pick up in 2024, which might slow progress on inflation and nudge long yields up but would benefit the parts of global equity markets that are pessimistically valued. Broadly, that means non-US equities in cyclically sensitive sectors and those benefiting from enduring growth themes, of which two particularly interesting ones are the decarbonisation energy transition and the spread of AI.”

The US Labor Department said that last month, employers added 261,000 jobs, while the unemployment rate increased slightly to 3.7%.