The Consumer Prices Index rose by 3.2% in the 12 months to August, jumping 1.2 percentage points from July's figure - the largest ever recorded increase since 1997. The Bank of England expects inflation to ease next year, but not everyone is as convinced.  

   

Wednesday’s inflation figures make for uncomfortable reading, but were expected. CPI rose by 3.2% in the year to August, and CPIH – which includes owner-occupiers'  housing costs – by 3%, with transport, hospitality, housing and household services, and recreation and culture being the main contributors.  

   

The Bank of England expects inflation to hit 4% by the end of the year because of supply bottlenecks and a labour shortage, but it expects this to ease next year, partly because of people returning from full-time education taken up during the pandemic.  

   

Part of the inflation figures for August are down to the fact that August 2020, in comparison, had seen lower prices in hospitality with the ‘eat out to help out’ scheme, the Office for National Statistics explains, adding that reductions in VAT in the same sector had been another factor.  

   

Inflation is now a top concern for pension trustees; more than a third of pension professionals believe that inflation is the greatest investment risk facing their scheme, according to mallowstreet Insights, with the majority expecting to see higher rates of inflation in the coming months. Just over half (56%) said they are already well hedged against these risks. 
 

    

A “tricky combination of artificially suppressed prices last year due to lockdown, rising fuel prices, the ongoing high demand in the second-hand car market and supply issues have all combined to create a steep rise in prices in August”, said Laura Suter, head of personal finance at investment platform AJ Bell, pointing to restaurant and petrol prices as well as increased shipping costs.  

   

Energy prices have also increased recently, with two more energy providers – Utility Point and People's Energy – ceasing to trade just this week due to wholesale prices hitting new highs.  

   

Susannah Streeter, a senior investment and markets analyst at platform Hargreaves Lansdown, said it is not just consumer prices but also the 5.9% increase in the price of goods bought and sold by UK manufacturers which will be unpalatable food for thought for policymakers at the Bank of England.  

 

“For months members of the monetary policy committee have been reading from the same menu, underlining that higher prices should be transitory. But with producer price inflation soaring, shipping costs showing little sign of cooling, commodity prices heating up, and vacancies tipping one million, there is a growing chance that one mess of a hot dinner could be arriving on their plates,” she said. 

 

Some wholesalers and retailers have already warned they can’t keep absorbing higher costs and will have to pass them on to their customers, she highlighted.  

 

“If higher prices linger, more members may move quickly to vote for a rate rise sooner than expected next year, but it would be an unpopular course of action with looming tax rises already hard to digest for many consumers,” said Streeter. 

 

While the UK absorbs the confirmation in numbers of what many have already felt in their wallets, the Financial Conduct Authority is taking steps to give consumers “confidence to invest”, it said in a new strategy published on Wednesday – among others encouraging them away from holding cash, which loses value quickly if inflation rises. 

 

 

The overarching aim being to reduce investment harm, the FCA wants to reduce by 20% the number of consumers who could benefit from investment earnings but are missing out, saying that nearly 8.6m consumers currently hold more than £10,000 of investible assets in cash. 

 

To achieve this, the FCA is exploring regulatory changes to make it easier for firms to provide more help to consumers who want to invest in “relatively straightforward” products 

 

Sarah Pritchard, executive director of markets, said: “We want people to have greater confidence to invest. We also want to be able to adapt more rapidly to the changing market and be assertive where we see poor conduct and consumer harm.” 

Industry has already welcomed the FCA's package of measures, including the plan to address the risk of excessive cash holdings.

“Far too many people miss out on the returns offered by investing sensibly for the long-term with the perception that investments are for other people or the natural instinct of loss aversion proving a real barrier," said head of pensions at provider Aegon, Kate Smith. "However, the reality is that having all your savings in cash carries its own risks as we’ve seen with inflation figures this week."

Kate Smith

Steven Cameron