Inflation rises to new 30-year high: What does it mean for UK entrepreneurs?

According to the latest UK CPI inflation data, UK annual inflation has risen to 5.5%. This means that British consumer prices rose at the fastest annual pace since March 1992. Earlier this month the Bank of England predicted inflation will increase to 7.25% in April. Following this, Business Leader spoke to some industry leaders to find out what they think the impact of the figures will have on UK entrepreneurs.

UK annual inflation rises to 5.5%

Sarah Giarrusso, Investment Strategist at Tilney Smith & Williamson, the wealth management and professional services group, comments on the publication of the latest UK CPI inflation data.

UK January annual CPI inflation came in at 5.5% (consensus: 5.4%) versus 5.4% previously. The underlying core CPI inflation (excluding energy, food, alcohol and tobacco) increased slightly to 4.4% (consensus: 4.3%) versus 4.2% previously.

The annual headline inflation rose to a new 30-year high. Increased goods prices continue to be a key driver of this headline figure. Food and non-alcoholic beverages rose by 4.3% over the year and there was also a surge in clothing and footwear, increasing 6.3% from a year ago and furniture, household equipment and maintenance increasing 8.4%. However, services did slow somewhat increasing 3.2% annually versus last month’s figure of 3.4%.

A continuing trend this month was the elevated annual figure for transportation which increased 11.3%, owing to the supply chain constraints disrupting new and used vehicle prices. Price rises in electricity, gas and other fuels also showed little signs of abating as the annual figure rose 7.1%.

The UK economy remains strong and grew by 7.5% in 2021, its strongest growth post war. However, the Omicron variant has caused some disruptions. The employment data released yesterday showed employment fell 38,000 in January. However, the labour market remains tight with vacancies at their highest level since records began in 2001 and an unemployment rate of 4.1%.

Given this strength and high inflation some economists are expecting the Bank of England (BOE) will have to be more aggressive than currently signalled by MPC members. However, there is cause that the BOE may well take a cautious approach and not raise interest rates at its next Monetary Policy Committee in March. Given growth headwinds from rising energy costs and an increase in National Insurance from April, the BOE could prefer to wait and raise interest rates at its 5 May MPC and several more times in the second half of 2022 so as not to impede the economic recovery.

Strong economic growth is likely to support company earnings and boost optimism for UK equities.

‘Inflation has the economy in a chokehold’

Rachel Winter, Associate Investment Director at Killik & Co, shares her thoughts on the data.

Inflation has the economy in a chokehold, with prices skyrocketing and consumers feeling significant pressure on their household budgets.

High energy prices and increased shipping costs are key contributors to this inflationary pressure, but there are other causes for concern in the near term. Consumers are braced for next month’s rise in rail fares, growing mortgage payments and higher national insurance, and the Office for National Statistics confirmed yesterday that wages are falling in real terms because they are not keeping pace with inflation. All eyes are on Russia and Ukraine, where conflict would be likely to push oil and gas costs even higher.

Although the Bank of England has raised interest rates and is set to do so again, the interest rates available in cash savings accounts are still pitiful in comparison to the current rate of inflation. Those with long-term cash savings should consider alternative ways of deploying their cash to earn greater returns, for example, by investing.

The inflation challenge facing UK investors

As UK inflation reaches its highest rate in 30 years, UK investors approaching retirement are divided on how their investments will be impacted by a sustained period of inflation, and the steps they should take to mitigate those effects.

New research carried out by Janus Henderson Investment Trusts as part of its ‘Big Five Oh!’ retirement campaign found that investors nearing retirement age perceived inflation as a greater threat to their investments than their younger counterparts. Older investors were also found to have made fewer changes to their investments in response to inflationary pressures than younger investors.

The ability to live comfortably in retirement was found to be a primary goal amongst all UK investors which may go some way to explain why those approaching retirement age are more wary of the inflationary environment than those nearer the start of their investment road.

Notable data points:

  • Expected impact of inflation:
    • Impact 38% of investors aged 55+ expect the UK’s sustained period of inflation to have a negative impact on their investments. Younger investors are more concerned, with 42% having that opinion
    • Both new and seasoned investors are split in what inflation means for their investments. Among new investors 27% think it will be positive compared to 39% that think negative, with the corresponding data for seasoned investors 28% and 34% respectively.
    • Looking at those with a different investment approach, the figures once again show a similar divide. 30% of ‘risky’ investors are positive about inflations’ impact while the same can be said for 26% of those that take a ‘conservative’ approach
    • Those investors that invest in collectibles and NTFs are the most optimistic, with 45% and 44% positive about the impact that a period of inflation will have on their overall investment portfolio
  • Changing strategy:
    • The looming impact of inflation has galvanised 30% of investors into making changes to their investment strategy to manage its effects. But it is those aged 55+ that are found to be the least likely to have made changes (22%) – and just a quarter (24%) of those heading into retirement (aged 55-64) have done so.
    • Furthermore, almost half (48%) of those 55+ have not just declined to make changes, they also have no plans to do so
    • While the same percentage of men and woman are yet to make changes, female investors are notably more likely to have plans to do (29% of men vs 37% of women)
    • Younger investors are more active in making changes, with half having done so (50%) and a further 32% planning to do so
  • Investment Goals:
    • 56% of investors cite ‘living the lifestyle I want in retirement’ as a primary investment goal

James de Sausmarez, Director and Head of Investment Trusts, Janus Henderson comments: “UK investors are all facing the challenges of an inflationary environment and, regardless of age or experience, the ability to live comfortably in retirement is a clear priority. The research shows that those nearing retirement age are more concerned about the risks inflation pose, perhaps because they recognise that their planned income streams will need to grow at least in line with inflation if the real value of their retirement income is to be maintained.

“They are the least likely group to have made changes in response to the current environment as their investment portfolios may be positioned for their retirement needs. Conversely, younger investors, who have more flexibility and can take a longer-term view, were found to have been more proactive in making changes to their investments in direct response to the present circumstances.

“With interest rates so low, holding cash or cash equivalent investments will not protect against the current inflationary environment. Equity based investment vehicles such as investment trust companies are better able to do so as they offer the prospect of both capital and income growth. Investors who are uncertain about what to do should consult a financial adviser or other authorised intermediary.”