This week’s chart highlights interest rates in the UK. The Bank of England has raised interest rates by 0.25%, bringing interest rates in the UK to 4.5%, in the continued attempt to bring down inflation. They have increased interest rates 12 times since December 2021, from 0.1% to 4.5%. Higher interest rates make it more expensive for people to borrow money and encourage them to save.
That means that, overall, they will tend to spend less. If people spend less on goods and services, prices will tend to rise more slowly.
That lowers the rate of inflation. The Bank of England knows that means that many people will face higher borrowing costs. Around one in three households in the UK have a mortgage. But high inflation that lasts for a long time makes things worse for everyone.
The Bank of England has little choice on this matter, as inflation is too high. In March, prices were 10.1% higher than a year ago. Inflation has been around 10% since last summer, well above the 2% target. Higher energy prices are one of the main reasons for this.
Russia’s invasion of Ukraine led to significant increases in the price of gas. Households’ energy costs have almost doubled since the start of last year. Higher prices for the goods we buy from abroad have also played a significant role. During the Covid pandemic, people started to buy more goods. But the people selling these had problems getting enough of them to sell to customers. That led to higher prices – particularly for goods imported from abroad.
There is also pressure on prices from developments at home. Businesses are charging more for their products because of the higher costs they face. In addition, there are many job vacancies, as fewer people seek work following the pandemic.
That means employers have to offer higher wages to attract job applicants. As a result, prices for services have risen markedly.
While still high, inflation peaked last October at 11.1%. However, we do expect to see inflation in the single digits when the numbers are released on the 24th of this month, due to the fall in energy prices over the last year, which will be a welcomed relief for the Bank of England and the general public.
Takeaway: Peter Lynch once said, ‘The real key to making money in stocks is not to get scared out of them.’
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Source: Marlborough Multi-Asset Investment Team, Bank of England, FT.