Should you be worried about inflation?

Inflation rose sharply this week should you be concerned and what can you do about it?  The economy has behaved differently as it comes out of recession.  What’s different?:

  • Unemployment is low and still falling (figures announced today) but yet wage increases are very modest indeed.
  • There’s a full scale housing boom in the South East and especially in London.
  • Interest rates are very low indeed at ½%.
  • Inflation has jumped up to 1.9% but for those of us around in the 1970s that’s still low.
  • The government has printed (electronically) huge amounts of new money through quantitative easing.

OK so what’s going to happen next.  Because this time it is different it is very difficult to predict, but here are my views:

  • Interest rates are likely to rise very slowly maybe as early as this Autumn – 2% by the end of next year?
  • The continued strength of £ against $ and Euro reduces inflation and makes us all feel better off – we need fewer £ to buy our oil, German cars or French wine.
  • Wage rises will increase over the next year as the labour market tightens.
  • House price rises are , nearly, out of control.
  • Overall I’d expect inflationary pressures to slowly build up.

What do you do?

  • Holding cash in inflationary times can seriously damage your wealth – make sure you have a diverse portfolio.
  • Don’t forget the labour market is tightening – your employees can get alternative employment!
  • Don’t forget to ask for price increases from your customers.
  • Be prepared for interest rate rises.

Overall I think the economy is behaving well at the moment.  Inflation may become a worry as we come out of recession, so definitely keep an eye on it, but there is no need to panic.

James Sheard.

0161 303 0610

James Sheard