UK inflation (CPI) grew by 5.4 per cent in December 2021, a 30-year high and up from 5.1 per cent in November.
Industry experts say today’s soaring inflation figures put pressure on the government to address the cost of living crisis, with state pensioners and those on benefits facing a ‘one step forward, two steps back’ situation.
Barnett Waddingham partner Simon Taylor says: “Usually, an increase in inflation is expected to worsen the funding position of DB pension schemes because this increases the cost of providing inflation-linked pension increases. However, despite inflation climbing in December, funding positions actually improved due to a fall in long-term inflation expectations. This put the average FTSE350 DB pension scheme on track to buyout in a decade – a 15-month improvement on November.
“This swing is a welcome reminder for those managing DB schemes to be astute in their reading of financial markets – there is a lot of noise around short-term high inflation and imminent base rate rises, but long-term inflation expectations moved in the opposite direction in December. As with all investments, it is important to take a long-term view; whilst it is vital to monitor movements in funding levels, journey plans should not deviate unless there is evidence of a fundamental change.”
Aegon pensions director Steven Cameron says: “December’s inflation increase of 5.4 per cent comes a year after inflation was 0.6 per cent in December 2020, just above zero. One year on, households are facing an ever-worsening cost of living crisis with inflation at the highest rate for almost 3 decades, making it higher than under 30s have experienced in their lifetimes. What’s worse is there’s no short-term respite in sight as without Government intervention, the energy price cap is rise set to drive inflation even higher in the spring, coupled with a National Insurance hike and income taxes on the rise due to frozen thresholds.
“Individuals across the generations are concerned about rising prices. Aegon research showed almost two in three adults were worried about the impact of rising prices on their personal finances even before the increases over the last two months.
“Today’s further increase will put even more pressure on the government to offer some respite to the millions of households facing a cost of living squeeze. State pensioners and those receiving benefits are in the spotlight with increases based on September’s inflation rate of just 3.1 per cent. With inflation now approaching double that at 5.4 per cent, it could be a case of one step forward but two steps back as state pensioners and those on benefits may see the coming April increase wiped out twice over in terms of their purchasing power.
According to Cameron a National Insurance increase is needed to help the long term social care funding crisis.
“The Government is facing a barrage of calls to think again, whether to grant a higher increase to state pensioners, to reduce taxes on fuel or to defer April’s National Insurance increase. If fuel price hikes are seen as temporary, a limited period of tax reductions there would be welcomed. However, deferring the increase in NI will only worsen the crisis in social care funding, which it’s designed to address. Time is also running out for any improvement on the 3.1 per cent state pension increase, with any movement there putting further pressure on today’s working population who pay for this through today’s National Insurance.”
AJ Bell head of investment analysis at AJ Bell Laith Khalaf says: “Inflation is going to pile serious pressure on UK households in the next few months, particularly when combined with the tax rises the Chancellor has planned for April. The main issue is that price rises are being most keenly felt in energy and transport, areas where expenditure is unavoidable, and which constitutes a bigger slice of the budgets of those on lower incomes.
“CPI now stands at 5.4 per cent, the highest annual reading since this measure of inflation was introduced in 1997, though significantly higher price rises were recorded in the 1970s, 80s and early 90s, when the now largely retired RPI measure was used. It will be little comfort to those feeling the pinch of price rises today, but looking over a slightly longer period, CPI inflation has risen by 6 per cent over the last two years. That’s only slightly more than it has increased over one year, thanks to the deflationary effects of the pandemic in 2020, which saw some oil contracts trading in negative territory, and tells us just how sharply prices increased over the course of 2021.
“The annualised nature of the inflation calculation suggests this spike may recede if commodity prices fall back towards the end of this year, or indeed simply fail to keep rising. Whether that will happen will continue to depend on Russia, OPEC and supply chain disruption. But commodity prices are cyclical, and as the saying goes, the cure for high oil prices is high oil prices.
“Probably a greater threat in creating sustained inflation comes from the labour market. A record level of vacancies, combined with a hefty increase in the National Minimum Wage could give a wage-price spiral a bit of momentum, taking root first within companies, and then manifesting itself in consumer prices. It was telling that the high street retailer Next has just warned the market that it faces 5.4 per cent wage inflation this year, and when added to elevated shipping costs, that means item prices are expected to rise by 6 per cent. If this sort of thing is happening across the economy, the risk is that inflation becomes embedded in the expectations of business and consumers, at which point it becomes much more sticky.
“The Bank of England has of course raised base rate back to 0.25 per cent, but that still means that cash savers saw their money lose 5 per cent of its buying power in 2021. The coming year isn’t shaping up to be much better, because the pace at which interest rates rise will only negligibly take the edge off inflation. The market is now expecting in another rate hike in February, but as we’ve often seen, the Bank doesn’t always follow the script laid down by market prices.”
According to Canada Life, this change in inflation means that UK households will need to find an extra £41 billion per year to maintain their standard of living compared to a year ago.
Each household will typically need to spend an additional £1,510 per year to maintain their standard of living from the previous year.
Canada Life technical director Andrew Tully says: “The cost of living squeeze is getting ever tighter, and today’s numbers paint a bleak picture with no relief on the horizon. Wages are lagging inflation, energy costs are set to rise by more than 50 per cent, and economists still expect inflation to peak over the coming months. We are in the eye of the storm and it will be interesting to see what happens at the next MPC meeting in early February around interest rates.
“In the meantime, people are going to have to strap in and hold tight, as the reality is the average UK household will need to spend over £1,500 extra this year if they wish to maintain current living standards.
“The rising costs of living can disproportionately affect people with fixed incomes, including retirees who typically live off pension income. Building some form of protection against the ravages of inflation is important if people want to maintain their living standards.
“Very few people currently buy an inflation proofed income at retirement. Retirement accounts can create the flexibility for people to bank a guaranteed income to pay the bills while also leaving money invested to pay for life’s little luxuries and help protect against inflation.
“A professional financial adviser can help you decide the best course of action for your personal circumstances and ensure you stay on track to enjoy the retirement you have worked hard for.”
Royal London senior economist Melanie Baker says: “The pressure is building for another rate rise from the Bank of England in February.
“Many of the sources of rising inflation could still be described as transitory, but with inflation surprising on the upside by so much, with core inflation higher and at such a high level, worries about inflation expectations are also likely to build.
“UK inflation is expected to rise sharply with another jump in energy bills expected in April when Ofgem reset the energy price cap. In the meantime, prospects of higher interest rates, high rates of inflation and pay growth that is not keeping pace means the financial situation of many households will be worsening. The chances of a strong year for real consumer spending are dimming further.”