But what does this latest inflation data mean for the business of investment and advice? Advisers, investment managers and other experts have been sharing their views with IFA Magazine on this inflation data and its impacts on markets and on savers’, investors’ and borrowers’ financial positions as follows:
Steven Cameron, Pensions Director at Aegon comments: “In a matter of months, inflation has gone from a distant 1980s memory to a ‘flashing red threat’ to millions of households across the UK today. The further increase to 10.1% from 9.4% last month means we are now into double digits, with rises expected to skyrocket further to 13% later this year. Put another way, your £10 last year is worth £9 today.
“With the final destination of energy prices unknown, the big question is how and to what extent the Government can support individuals facing further massive energy cap hikes. Research (*) this month from Aegon showed financial worries are already at almost double the levels during the pandemic and this latest inflation increase, crossing the double digit threshold, will dial those worries up another notch.
“This latest inflation hike comes a day after official figures showed year on year increases in average regular earnings have slowed to 4.7%, well under half the current 10.1% rate of inflation, creating the worst loss in ‘real terms’ earnings for decades. For millions, the overriding focus will be on paying bills over the winter, but the aftermath could also come at a cost to longer term financial futures.”
*Aegon research showed nearly two thirds (63%) of adults were worried about their finances, which compares to a third (36%) surveyed during the height of the pandemic (Aegon research among 2,000 adults in August 2022 compared with research among 2,000 adults in October 2020, conducted by Opinium).
Martin Lawrence, Director of Investments at Wesleyan, the specialist financial services mutual, said: “As the cost of living continues to rise and with the Bank of England now warning of a recession, many people will be increasingly worried about their finances.
“Right now, many will be reviewing their finances and seeing what changes they need to make to cover the increases in fuel, food and other bills. Some will have very limited options, but for those who do have choices and are fortunate enough to have savings, it’s important not to make short-term decisions that could have far reaching consequences over the longer term.
“This includes stopping pension contributions, or dipping into investments designed for longer time periods – steps that could affect how much people have available when they reach retirement.
“It also means being careful with changes to investment strategies. Some people might be looking at market and economic conditions and wanting to adapt how, where and when they save their money.”
Jonny Black, Strategic Director, abrdn, said: “These inflation figures are just the latest in the continuing uncertain economic environment for clients. “The Bank of England has forecast at least a year of recession, and that inflation will rise to at least 13% by next October. This is a level that many clients simply won’t have experienced. Now, more than ever, they’ll be looking for steady guidance and expertise to help them determine what to do with their money.
“On a fundamental, practical, level, ensuring that clients continue to have the right mix and balance of investments for their personal objectives will be key. Following today’s announcement, more adjustments might need to be made.
“But, in the face of a more pessimistic economic outlook, clients will also really value any additional insight advisers can offer – whether that’s sharing resources to help them understand the implications of recession or a prolonged, high-inflation on their finances, or a quick chat to discuss their queries and concerns. These are uncertain, challenging times, but what’s for sure is that it’s another chance for the advice sector to really demonstrate its value.”
David Robinson, chartered wealth manager at London-based Wildcat Law: “Savers need to beware the false safety of cash deposits, as inflation will erode the real value of money held in them. If you have cash savings and debt then you should give serious thought to paying off the debt now. The days of cheap money from debt are over. If you do not need to access your cash anytime soon then consider investing. Markets may be set for difficult times, but a well balanced portfolio will be the best way to ride out the coming storm. History shows that equity markets do recover well and offer the best form of protection longer term against inflation. To quote the old adage, it is time in the market, not timing the market.”
Adrian Kidd, chartered wealth manager at Aylesbury-based EQ Financial Planning: “Savers need to be proactive in getting their money working as best they can. This means not just relying on the local branch for savings accounts, it means using the internet to obtain the best savings account rates possible. If you are a borrower, make sure you are not over-stretching and if you have savings, pay back high-interest rate debt first. If your mortgage rate is looking to be more than 3% then repaying some debt may be a good thing. I would also not suggest fixing interest rates for longer than two years as rates will need to come down at some point, too. Investors should stay patient and add capital if they can when markets dip. As we have seen in July, markets can rebound aggressively so staying invested will reward you. Remember what you’ve invested for and that it is time in the markets rather than timing them that rewards you better than cash accounts will.”
Scott Gallacher, chartered financial planner at Leicestershire-based independent financial advisers, Rowley Turton: “Despite the recent rate rises, because of higher inflation, savers are arguably in a worse position than they were a couple of years ago. This is because ‘real’ savings rates are even lower. That said, the higher rates do at least make shopping around worthwhile. Previously, when rates were at their lowest, you might only be missing out on 1% per annum by sticking with your current bank. However, now you could be missing out on up to 3.5% a year by not moving your account. For investors, it’s generally a case of sitting tight. However, they might want to check their exposure to the long-term debt markets, as these are likely to be the most affected by higher inflation and rising interest rates. Meanwhile, borrowers might want to look at locking into longer-term rates to protect them from rising rates. Also, we might be returning to the days of the 70s and 80s when house buyers were encouraged to borrow the maximum they could. This was because high wage rises and high inflation would erode the value of that debt, and the mortgage payments, incredibly quickly.”
Daniele Antonucci, chief economist & macro strategist at Quintet Private Bank (the parent company of Brown Shipley), comments:
“Today’s UK inflation print of 10.1% in July is the first double-digit annual increase in over four decades. This is an upside surprise relative to consensus expectations and a further rise compared to the 9.4% rate of the previous month.
“One of the key drivers of the latest rise is higher food prices, though the report shows that price increases have broadened from high energy prices to other goods and services across the economy at large.
“This highlights the difficult growth versus inflation trade-off the Bank of England is facing. To bring inflation down, it will have to raise rates aggressively. We expect a second 50 basis-point rate increase to 2.25% in September.
“This may cause the economy to enter recession. Our conviction on euro area and UK recession has increased recently and is now our base case as the higher costs squeeze incomes and negatively impact confidence. We expect the UK economy to contract outright from later this year.
“With the ongoing Conservative leadership contest to select the next prime minister in a few weeks, today’s inflation figures are also likely to grab the headlines and draw extra attention to declining living standards for households across the UK.”
Daniel Wiltshire at Bradford-on-Avon-based Wiltshire Wealth: “The market tends to be ahead of the news cycle, so the apocalyptic headlines we’re reading today will already be largely priced-in. My advice to investors amid the macroeconomic carnage is to stay calm and try not to let your emotions drive investment decisions.”
Kusal Ariyawansa, a chartered financial planner at Manchester-based Appleton Gerrard: “In times of hardship, it is vital to maintain essentials while knowing that luxuries can be deferred. Pension savings are for the future while bills and insurances are for today. You can plan for and restart savings but you can’t do much if things go wrong. It is therefore vital to maintain existing safety nets so that you and you family don’t regress further should the worst happen.”
Rob Peters, director of Altrincham-based Simple Fast Mortgage: “Savers are not really seeing the benefit of increased interest rates filter through yet but savvy rate hunters will find some providers offering higher than average rates. Investors may need to review their holdings to ensure they continue meet their objectives and risk profile. Now that the economy and wider markets appear to be entering a new cycle, there could be shifts in growth and/or income opportunities. Borrowers will be the worst hit. While savers can choose to save, and investors can choose to invest, many borrowers have less of a choice about holding debt. Everyone should be going through a budget sheet exercise to make sure they are aware of their income and outgoings and can make the necessary adjustments. Those with revolving debt such as credit cards and overdrafts, which are more susceptible to rises in costs, may want to consider reducing exposure in this area, if possible.”
Fanny Snaith, a Cheltenham-based certified money coach: “Even though inflation is way higher than the interest rates being offered to savers, people must have liquid cash, or a Peace of Mind fund, available to them should they need it. It’s a bitter pill to swallow knowing your money is being eroded in real terms but emergency funds in the current climate are essential. Investors should keep regularly investing, as long as they can afford it. Investments that are down currently may well be a great sale item to take advantage of. Borrowers need to stress-test their borrowing before they commit. Add 4% on top of the rate offered and ask yourself if you can afford that? If not, think very carefully about committing.”
Samuel Mather-Holgate of Swindon-based advisory firm, Mather & Murray Financial: “Higher inflation should mean higher interest rates so, after a decade of low rates, savers should be in for good news. If you choose to keep your money in cash, I would expect several more interest rates rises, totalling about 1.5%, before the Spring. Investors are in for a rocky ride over the next 12 months. They have already experienced a lot of volatility. Markets are forward-looking, so will have already priced in the coming recession and the expectations of interest rate rises. However, if the recession is worse than expected there could be further falls. I would remind investors that these types of investments are long term, and returns tend to better cash over most five-year periods so you shouldn’t look at a one-year return in isolation. If you have a mortgage, or are looking to borrow some money, my advice would be to lock in your rate now. If you prefer certainty, lock in for a long period as interest rates are still historically low, despite them increasing. A word of caution though; when inflation falls back to normal levels, in six months time, and the recession is in full swing, the Bank of England will be forced to cut interest rates. We just don’t know by how much yet.”
Jonathan Burridge, founding adviser at hybrid mortgage adviser, We Are Money: “From a mortgage advice point of view, I would recommend clients to act as early as possible if their rate is coming to an end. There is a view that we have seen all the base rate movements for a while, but the market is uncertain and there is still plenty of risk of further rises. With more and more lenders providing offers valid for six months on remortgages, it is possible to start planning seven to eight months ahead of the approaching end date of an existing deal. Look at your unsecured debts that are on variable rates, like credit cards and overdrafts. It could be a good time to consider repaying these from savings or by consolidating into one new fixed rate loan. If costs are starting to bite, can you change some of your existing contracts, extending the term or moving to a fixed rate that might reduce your costs or prevent them from rising.”
Lewis Shaw, founder of Mansfield-based Shaw Financial Services: “Anyone taking out a new mortgage needs to establish what future costs might look like to avoid getting themselves into financial hardship. If you already have a mortgage, it’s about acting sooner rather than later and possibly extending the term of your mortgage to free up more disposable income if you’re already stretched. Anyone looking to increase the term of their mortgage should be aware that you’ll likely end up paying more in interest over the term, but that is preferable to not making ends meet and getting into financial difficulty. Finally, remember that while inflation is biting us at the moment, the value of your debt is shrinking as long as your wages are going up relative to the rate of inflation. So maybe it’s time to ask for that pay rise.”
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