Inflation is on the rise in the US, according to new data from the US Department of Labor. Stats show that inflation in April grew at its fastest pace since 2008, as the economic recovery gained momentum.
But what about the UK? Are we heading in the same direction, and if so, what could this mean for your money? Let’s find out.
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US inflation: what are the figures?
According to the US Department of Labor, the Consumer Price Index (CPI), which tracks the rise in the prices of goods and services including food, clothing, energy, housing and cars, increased by 4.2% in the year to April, up from 2.6% in the year ended in March.
This is the largest increase since September 2008.
The month-to-month increase was 0.8%, which was far higher than the 0.2% predicted by economists.
Excluding often-volatile energy and food prices, the core CPI increased by 3% from the year before and 0.9% on a monthly basis. Both of these figures were higher than the 2.3% and 0.3% predicted by economists.
What is causing the fast pace of inflation in the US?
The inflation figures could be rising because of a combination of factors.
The biggest one, according to the Daily Mail, is a surge in demand as more people start spending money again. Unfortunately, current supply is insufficient to meet this demand. As a result, the prices of a variety of items have gone up.
For example, used car prices increased by 10% in April alone. According to the Labor Department, this accounted for nearly one-third of the month’s overall increase in inflation.
Another factor that may be contributing to high inflation in the US is the need for businesses to raise their prices in order to survive and offset some of the losses incurred during the months of shutdown.
Could the UK be heading in the same direction?
Not surprisingly, the jump in US inflation figures has heightened global inflation fears. There are legitimate concerns in the UK that we will soon follow in the footsteps of the US.
According to Kevin Brown, savings specialist at investment firm Scottish Friendly, the US figures “provide a small window into the future for the UK where we expect prices will follow a similar trajectory over the coming months, as more restrictions are eased and consumers are given the opportunity to spend freely once again.”
The UK is expected to fully reopen most sectors of the economy in the next one and a half months.
This could unleash pent-up demand accumulated during lockdown and a consumer spending spree that could see the cost of items rise significantly.
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What does this mean for your money?
Aside from the obvious disadvantage of rising prices, which may make it difficult and expensive to maintain your current lifestyle, high inflation is bad news for those who were able to save money during lockdown.
Brown summarises it pretty well: “The risk for households is that a sustained period of higher inflation could be damaging to many savers who will find it almost impossible to find a home for their cash that offers a rate of interest greater than that.”
In other words, the lack of savings accounts with rates that can match or exceed that of inflation means that savers face the prospect of seeing their money progressively lose its value over time.
How can savers hedge against inflation?
Investors may want to consider investing in stocks and shares to hedge against inflation. Rising prices of goods and services can translate to higher profits for businesses. In turn, this can boost investor confidence and lead to an increase in share prices.
Nothing is guaranteed, of course. But over the long term, the stock market has historically provided investors with returns that beat inflation.
It’s an option worth considering, but make sure you do your homework first.
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