Inflation: good news or bad news? #thrifty
It seems likely that in the new year prices of essentials like gas and electricity will increase as well as imported food. The US dollar is the international reserve currency and is used for international trade. The pound has been devalued against the dollar. Last November the pound bought $1.60, now it buys just $1.24. While food manufacturers try to absorb the extra cost, energy providers will eventually pass the cost on to us the consumers. Higher interest rates and a depreciating currency will drive inflation.
Imported food will probably go up in the coming months as will manufactured food that uses imported ingredients. I’ve already noticed some food prices increases since the Brexit vote and the devaluation of the pound. Food inflation is already evident on the fish counter where prices are rising quite quickly. It might be worth freezing some fish for use in the coming months. Fruit and vegetable prices don’t seem to be going up much yet but we can expect price rises. If you use one of the big four supermarkets this could be a good time to consider buying some of your shopping in Aldi or Lidl or shopping in your local market. I’m shopping around and I went in Asda this week, but it will be Aldi next week. It might be worth popping in Lidl too just to see what they have on offer if I’m passing.
The lower value of the pound also drives energy inflation and we will see that reflected in higher energy bills through winter. They will be delayed if you have a fixed tariff but the price rises will be applied when your current fix ends. Many prices rises won’t take effect until next winter because the energy market is regulated.
The pound has devalued against most major currencies and holidays will cost more and when you convert your pounds to euros or dollars, you will get fewer for your money. One dollar cost around 60p last year, but this year costs about 80p
Housing costs inflation
If you have debts then inflation can inflate away your debts and it certainly inflates away government debt. However, in the short-term, higher interest rates could put your finances under pressure. It seems likely that the US will increase their base rate in December and so the dollar will appreciate even more against the pound putting pressure on the Bank of England and other central banks to follow suit and increase interest rates. Rents will also increase if interest rates rise.
Wage inflation usually follows price inflation and so a vicious circle begins. This is bad for people with money in the bank but the pay rises will help people afford the higher food, energy and mortgage costs. In the long-term investors and property owners will benefit as their mortgages shrink in real terms.
There are now a lot more reasons to be careful with money and to invest and save.