Inflation soars to 4.2% in October


The Consumer Prices Index (CPI) rose by 4.2% in the 12 months to October 2021.  This is up from 3.1% in September and is the highest rate of inflation since November 2011. 

The new figures come as a worrying shock, with economists previously forecasting a rise of up to “only” 3.9% by Christmas – although the Bank of England itself has expressed that it expects inflation to rise to about 5% next year before falling back towards its 2% target in 2023.  At more than double the Government target, 4.2% marks a stark departure from where annual inflation rates are expected to be in a healthy economy. 

What is causing the record-high inflation?

There are a number of contributing factors that are  pushing inflation rates up. 

There are basic supply issues. Businesses in the public sector are finding it difficult to recruit new hospitality staff and those in the private sector are struggling with a lack of suitable lorry drivers to transport essential goods. As a result, wages are having to be increased to entice more workers in these areas. 

Compounding this issue, there are also shortages of building materials and basic supplies such a computer chips, which are in turn having their prices inflated to compensate. 

Many businesses that were receiving aid from the Government to help with pandemic related costs such as reduced VAT for hospitality have recently stopped receiving Government support. 

Alongside these, there are wider concerns around gas and energy prices after the energy regulator Ofgem lifted its cap on household bills in response to the wholesale gas prices soaring to record levels as the world attempts to re-adjust to pre-pandemic levels of energy use. 

Chief economist at the ONS Grant Fitzner commented: “You will see gas prices have gone up in the last day or two following the announcement from the German government on the Nord pipeline. It’s not clear that energy prices have peaked yet.” 

According to the international policy forum the OECD, many of these contributing factors are being compounded by the aftereffects of Brexit and the global pandemic.

"Many countries are experiencing higher inflation as we recover from Covid,” said Chancellor Rishi Sunak, “and we know people are facing pressures with the cost of living."

How will the inflation explosion affect me?

The continued increase in inflation rates will put ever more pressure on the Bank of England to raise interest rates in response, amid growing concerns over the cost of living. 

“Inflation moving further away from its 2 per cent target may seal the Bank of England’s resolve to raise rates in December, following the strong labour data released this week,” said Yael Selfin, chief economist at KPMG UK.

As outlined in our previous article on inflation, raising interest rates can negatively impact those borrowing, as it increases the interest and therefore the cost of paying back loans. Therefore, certain demographics such as those paying back student loans are adversely affected when the Bank of England raises interest rates.  

For savers, a higher inflation can be devastating. Our inflation calculations indicate that at the current rate of 4.2%, the real value of your money will halve in just over 16 years if you leave your cash to languish in a high street bank current or savings account paying 0.01% or less.

Inflation rates like these are understandably worrying. At The Private Office, we can to help you make the right saving and investment choices in these uncertain times. If you’d like to know more about how to mitigate the effects of inflation, request a free non-committal initial consultation with one of our team or give us a call on 0333 323 9065 and get in touch.

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Please note: This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.