Counting the cost of inflation and prepare for challenges ahead

INFLATION hit a 30-year high of 5.4% last week and if you thought that was painful, brace yourself, because you ain’t seen nothing yet.

In the US, consumer prices are growing at a mind-boggling 7%, and are expected to go higher.

The crunch will come in April, when Ofgem will increase the energy price cap from today’s £1,277. It is expected to rise by around 50%, driving the average annual gas and electricity bill to £2,000. Millions will be unable to pay, it’s that simple.

Central bankers such as the Bank of England and US Federal Reserve deserve a chunk of the blame, as they spent most of last year in denial. But finally, Bank of England governor Andrew Bailey has admitted what experts have been shouting for months – it is here to stay.

The Bank expects inflation to peak at around 6% in April but Hargreaves Lansdown personal finance analyst Sarah Coles warned: “Unless the Government intervenes in the energy market, there’s every chance it could go as high as 7%.”

Pay more, get less

There is no escaping inflation, as it is driving up the prices of essentials such as food, home energy and petrol.

Our shopping trolleys have seen some big rises, with margarine up 27.3% in a year, oils and fats up 13.1%, crisps up 9% and low-fat milk up 8.2%. Sarah says: “This makes it far more difficult for us to cut costs unless we stop buying milk and margarine.”

As petrol prices rocket, filling up a 55-litre car costs £17.44 more than this time last year, with overall transport costs up by almost 12%.

And second-hand car prices have accelerated 28% in a year, as demand outstrips supply, Sarah adds.

“Someone who bought a used car a year ago may find it is worth more now than when they bought it.”

The state pension will rise by just 3.1% in April, thanks to the Government’s decision to scale back the triple lock. And wages rose just 3.5% in November.

Canada Life technical director Andrew Tully says: “We are in the eye of the storm, as the average UK household will need to spend more than £1,500 extra this year simply to maintain current living standards.”

Debt woe

This is bad news for everybody, he says, but particularly so for pensioners, who typically live on fixed incomes.

It is little wonder that one in three of us is struggling to keep up with bills and credit commitments, according to debt charity StepChange.

More than two million households with at least one dependant child face fuel poverty and Peter Smith, director of policy and advocacy at charity National Energy Action, wants the Treasury to take action.

“We are calling on the Government to expand eligibility for the £300 Winter Fuel Payment from just pensioners to 2.4 million working-age, low-income households,” he says.

As yet we do not know what the Government will do, although Prime Minister Boris Johnson’s refusal to scrap the 5% VAT charge on domestic energy bills is a warning shot.

National Insurance hike

The inflationary surge will put an end to more than 12 years of near-zero interest rates.

The Bank of England increased interest rates in December to 0.25%, but markets expect four or five more hikes this year, driving up mortgage costs.

The first could come at its next meeting on February 3.

As if this were not bad enough, the Government will increase National Insurance from April, introducing a 1.25% levy to fund health and social care costs.

Pressure will grow on the Government to scrap that untimely hike, but with income tax thresholds frozen for five years, workers will still be handing more of their earnings to HMRC.

The Government will also face further calls to restore the triple lock to reflect the difficulty many older people now face, says Becky O’Connor, head of pensions and savings at Interactive Investor.

“Inflation will further erode the value of their cash pots, as savings rates remain stubbornly low while everything else rockets,” she says.

Even stock markets will struggle to keep up.

Becky says: “Equities grow by around 5% a year over the longer run, which is less than the current rate of inflation.”

The elderly must make sure they claim all their state benefits, with more than a million failing to claim valuable top-up pension credit, she adds.

Calling on the Government to expand eligibility for the Winter Fuel Payment

More struggles on the way

There is only so much people can do to fight back.

Traditional money-saving advice is starting to look redundant given the scale of the challenges ahead.

Telling people to draw up a budget, cut household spending, monitor their energy bills and shop around for top deals almost sounds insulting. They are doing that already.

The grim truth is that things are going to get worse, before they get any better.

They could get really bad if the pound collapses under the pressure, as that would drive up the cost of imports.

All we can do is hope the storm passes sooner rather than later.