The Perfect Storm for Inflation and how it affects you

Inflation is a term that often lurks in the shadows of our economic discussions, only to burst into the limelight when its effects start pinching our wallets. Over the past few years, several factors have contributed to what some are calling the “perfect storm” for inflation. In this blog, we’ll explore these factors and discuss how they can affect you, as an onlooking consumer.

Brexit Supply Chains

Brexit, the United Kingdom’s decision to leave the European Union, had far-reaching consequences on global supply chains. The uncertainty surrounding trade agreements, border checks, and new regulations caused disruptions in the flow of goods. As a result, the prices of some imported products have risen. The weakened pound further exacerbated this issue, as it made imports more expensive. Whether it’s electronics, clothing, or everyday items, the cost of many goods has crept upwards due to these supply chain issues.

COVID Supply Chains and Lockdowns

The COVID-19 pandemic was another major disruptor to inflation. Lockdowns and restrictions forced many factories to close or reduce production, causing a shortage of goods. Simultaneously, the demand for certain products like home office equipment, medical supplies, and packaged foods surged. The resulting supply-demand imbalance drove prices higher, contributing to inflation.

Interest Rates Held Too Low for Too Long

Central banks worldwide, including the Bank of England, maintained historically low interest rates for an extended period after the 2008 financial crisis to stimulate economic growth. While this measure was necessary during the crisis, keeping interest rates low for an extended period can stoke inflation. Low rates encourage borrowing and spending, which can lead to an excess of money in the economy, driving up prices.

Consumer Splurge Spending

In the wake of the COVID-19 pandemic, governments across the globe introduced various stimulus measures. In the UK, initiatives like the Stamp Duty Land Tax (SDLT) incentives, COVID grants, and “Eat Out to Help Out” encouraged consumer spending. People rushed to make home improvements, dine out, and engage in other activities they had abstained from during lockdowns. This sudden splurge in spending added fuel to the inflationary fire, as it increased demand for goods and services.

The Liz Truss Effect

As if the inflation situation weren’t complex enough, Liz Truss’s actions in the realm of bond markets further muddied the waters. Her poorly explained spending plan raised concerns about government debt and the sustainability of such expenditures. Bond markets responded by demanding higher yields, which meant the government had to offer more attractive interest rates on its debt. This development triggered a cycle of rising interest rates, which can have a cascading effect on the entire economy.

All these factors together have created a perfect storm for inflation, causing prices to rise at an alarming rate. And when inflation takes off, it affects you and your finances in various ways:

Purchasing Power: Your money doesn’t go as far as it used to. With rising prices, the same amount of money buys you less, eroding your purchasing power.

Savings: If your savings are in low-yield accounts, their real value can be eroded by inflation. This makes it crucial to consider investments that outpace inflation.
Cost of Living: Everyday expenses like groceries, housing, and transportation become more expensive, impacting your budget and overall quality of life.
Interest Rates: As inflation rises, central banks may respond by increasing interest rates. This affects the cost of borrowing, including mortgages and loans.
Investments: Inflation can impact investment returns. Some assets may perform well in an inflationary environment, while others may suffer.

In conclusion, the perfect storm for inflation is a complex interplay of Brexit-related supply chain issues, COVID-19 disruptions, low-interest rate policies, consumer splurge spending, and government fiscal policies. It’s crucial to stay informed about these economic factors and consider strategies to mitigate the impact of inflation on your finances. Diversifying investments, keeping an eye on interest rates, and carefully managing your budget are some ways to navigate these challenging times and protect your financial well-being.

Irrespective of your property ambitions, we can all benefit from a helpful guiding hand in making the right mortgage related decisions, and out of this storm as well informed as possible! The Carbon team are here to help. Call the team on 01932 505 340 or email us at:info@carbonfc.com.