In the past few months, inflation in the UK has hit a 40-year high. The Office for National Statistics (ONS) reports that prices rose by 9% in the year to April 2022, with many experts predicting it could go even higher later this year.

Perhaps surprisingly, the UK’s inflation is currently the highest among the G7 nations. So, why is this? And why can this have a negative impact on the economy and your wealth? Continue reading to find out everything you need to know.

The UK has the highest inflation in the G7

Inflation is measured using a basket of goods known as the Consumer Price Index (CPI), and it reached 9% in the 12 months to April 2022, up from 7% in March.

While inflation has been rising across the world, the latest data shows that the UK currently has the highest inflation of all G7 nations, as the chart below shows.

Source: the Guardian

As you can see, the UK is head and shoulders above most of the other G7 nations when it comes to inflation. There are two key reasons for this.

1. The energy crisis

To start with, the energy crisis is having a serious effect on inflation rates in the UK.

The UK is a net importer of energy, the prices for which have risen sharply due to Russia’s invasion of Ukraine. This has driven up inflation. Also, demand for energy has increased post-lockdown, leading to a surge in oil and gas prices.

Even though the energy crisis is having an effect globally, some G7 countries are less affected by this than others.

France, for example, relies on its own nuclear energy, while Italy has a windfall tax to protect consumers from high energy bills. Germany, on the other hand, has cut fuel tax by 30 cents a litre, while the UK only made a 5p cut.

2. Covid-19

And, of course, the pandemic has also played its part in pushing up inflation. Supply chains, especially those in China, were heavily disrupted during the pandemic. Due to supply and demand, the harder it is to produce goods, the higher the prices climb.

As you can see, inflation in the UK has risen sharply thanks to a perfect storm of conditions. Keep reading to find out the effects that high inflation can have on you and the wider economy.

Inflation causes your savings to lose purchasing power

When inflation rises, your money can lose its purchasing power. This means that the money you have saved will likely have reduced in value in real terms if interest rates are not keeping up with rises in the cost of living.

For example, if inflation were to stay at 9%, something that cost £100 a year ago would instead cost you £109 today. Compare this to the returns on the best easy access savings account which, Moneyfacts reports, is 1.52% as of 15 June 2022.

Here, if you’d saved £100 a year ago at this interest rate, your savings would be worth £101.52 today. You can see that your cash has lost value in real terms as you can’t buy the same goods and services with it that you could a year ago.

Aside from saving and purchasing power, inflation also has a knock-on effect on the economy itself.  When the rate of inflation is high, demand for goods and services is stimulated. Individuals spend now as they don’t want to be paying significantly more in the future!

To combat this, the Bank of England has raised interest rates four times since December 2021. This encourages individuals and businesses to save rather than spend, reducing demand and hopefully alleviating some of the price rises.

Get in touch

Rising inflation can make it more of a challenge to plan your finances, so if you would like help managing your money amid the cost of living crisis, email us at hello@caltonwm.com or call 01313 786680.