Will inflation continue to rise? Expert view

Will inflation continue to rise? is the question many of us need answered. Peter McGahan takes a look at what is driving up the cost of living.

Will inflation continue to rise?

In 2018, I sought about making my own home as sustainable as possible, in fact ‘dirty energy’ free. Whilst an aim was to do my bit for the planet, I don’t mind admitting that my primary goal was to stuff those with their hands in my pocket – ‘dirty energy’ companies.

In years to come, more of us will need to swiftly move to energy efficiency and given today’s soaring energy costs, it would well be worth looking at the costs of upgrades to your home. With rates still low, adding to your mortgage to invest into energy upgrades to eradicate energy bills where possible, could potentially be a net saving per year.

Following last week’s column on inflation, let’s look closer at the drivers and costs so you might understand where that may go further.

Will inflation continue to rise?

Whilst Central banks talk of raising rates to slow consumer spending, I really cannot see the point in that. As I pointed out last week, consumer spending is still below 2019 levels and inflation was much lower then. Consumer spending over the last seven quarters has been well below the average and the second quarter of 2020 flatlined. That money was not creating a surge in prices of course.

Furthermore, there is a measure called the savings ratio. This is the amount of disposable income that is saved. Using the same metrics to compare, this ratio was at 22.8% in 2020 (never above 15 in its history) but that now stands at just 8.3%, so the money was pumped into the economy at the end of 2020 and again last year. There was a fear/belief that this ‘wall of money’ would really stimulate the economy, but it’s already gone.

The real drivers (and not matters that your mortgage rate will affect) are wide and varied. Covid and supply chains are a huge driver. If a factory closes in Asia because of an outbreak, semiconductors for cars aren’t produced, so new cars are at a premium and like used cars, increase in price – inflation.

Where next for our energy needs?

The UK and Ireland have hardly taken their green energy goals to the levels they should have; hence they are still more dependent on ‘dirty’ fuels than they need to be. This causes problems. To make gas easier to transport via sea, they convert it to Liquified Natural Gas or (LNG). Many Asian countries grabbed what they could, driving demand through the roof and LNG doubled in price in December.

Europe’s largest gas field is now expected to shut in 2022, eight years ahead of plan. There were significant risks of earthquakes because of drilling. Consider supply and demand.

Oil supplies are also low, given the sanctions placed on Iran/Venezuela. Who’s applying those sanctions?

You may have spotted some issues about a place called the Ukraine?

Political chicanery continues to unsettle markets

Nord Stream2 is a controversial new pipeline to take Russian gas to Germany via the Baltic Sea (skipping Ukraine completely). Russia supplies a third of Europe’s gas as it is (before the Dutch field is shut down). Currently this project is at the heart of a disagreement between the USA and Germany. I’m sure you are getting the picture. Russia will naturally see all of this as a bargaining tool and with three aces, I can see why. This back up in supply, creates further fear in the markets and supply/price issues. Oh, and the Ukraine will lose $2bn per year in transition fees if this happens.

As another example of the knock-on effects, consider September’s rise in beer, meat, fizzy drinks. The cause? The big fertiliser plants are fuelled by natural gas. They stopped production because of the cost of gas. When you make fertiliser, a by-product of the production is carbon dioxide which is used to carbonate drinks, so with few fertiliser plants functioning, no drinks! Supply.

Planes were also not flying and, as I pointed out last week, delivery costs via sea cargo soared, due to the demand for space from air cargo products.

I can see the benefit of scaring the public with rates, into not being complacent that inflation is ‘here to stay’ and ‘I want more wages’ which would cripple the economy. My view is that with supply chains opening, pressure on rates won’t be here beyond two years, perhaps significantly less.

If you would like advice on Inheritance tax you can call 01872 222422, email [email protected] or visit wwfp.net.

Peter McGahan writes a weekly column for 50connect. If you found Will inflation continue to rise? interesting, you’ll find more tips for managing money on our Finance channel.

Tags: , Last modified: February 21, 2022

Written by 4:43 pm News & Views

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