At Wells Gibson we believe the number one enemy of the long-term investor is the financial dragon called inflation (the silent but steady increase of prices over time). The oﬃcial measure of price inﬂation more than doubled in the year to April, driven higher by rising energy prices and higher clothing retail prices.
The Oﬃce for National Statistics (ONS) reported that the Consumer Prices Index (CPI) measure of price inﬂation rose to 1.5% in the twelve months to April, up from 0.7% a month earlier. CPI inﬂation now stands at its highest level since last March but remains below the Bank of England target of 2%.
A signiﬁcant driver behind rising inﬂation is a comparison with lower prices a year earlier, at the onset of the pandemic. While gas and electricity prices rose sharply relative to their low levels last year, and the default tariff cap for domestic energy bills increased, these are unlikely to be sustainable inﬂationary pressures.
According to the ONS, energy prices rose 8.5% between March and April, and the cost of petrol and diesel at the pump rose 13.6% on an annual basis during that period. The other driver behind higher CPI inﬂation was more expensive clothing prices, following the reopening of non-essential retailers in England on 12th April, as part of the phased removal of lockdown restrictions.
Grant Fitzner, chief economist at the Oﬃce for National Statistics (ONS), said:
“Inﬂation rose in April, mainly due to prices rising this year compared with the falls seen at the start of the pandemic this time last year.
“This was seen most clearly in household utility bills and clothing prices.
“As the price of crude oil continues to rise, this has fed through to the cost of motor fuels, which are now at their highest since January 2020.”
An increase in CPI inﬂation in the year to April was widely predicted by economists, and concerns remain about how much inﬂation could rise this year as the global economy recovers from its slump in 2020.
Rising price inﬂation, if sustained, could result in a tightening of monetary policy, with the Bank of England using an interest rate rise in response to stem inﬂationary pressure.
The Bank forecasts CPI inﬂation rising to 2.4% in the ﬁnal quarter of the year, with higher energy prices the dominant driver.
However, it seems likely that higher inﬂation will be short-term and transitory. Bank of England governor Andrew Bailey said earlier this month that any inﬂation spike is expected to be temporary and should then return to around the 2% target level in the medium term.
A factor likely to dampen rising prices later this year is an end to the furlough scheme, with accompanying prediction of rising unemployment levels. Wage growth is also expected to be limited in 2021.
In closing, please know this: over the last 30 years (about the length of an average two-person retirement), inflation in the UK has resulted in an item costing £1 in 1991 now costing £1.88 in 2021. Your purchasing power has almost halved!
However, £1 invested in the UK share market is worth £3.25 today, and that’s ignoring 30 years of dividends!
Guiding you through periods of volatility and economic uncertainty is why we exist and one last thing, don’t become too fixated with economic forecasts as most are wrong.