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The inflation delusion

Monday 18th September 2017

Inflation has broken through the government’s own target of 2% but we appear to be giving a collective shrug.

The health of household finances is generally viewed, by politicians at least, through the prism of inflation. This week the government’s preferred measure, the Consumer Prices Index (CPI), rose to 2.9% for August, up from 2.6% in July and matching what was, in June, a four-year high.

Most people are aware that inflation is up and that various influences are undermining the strength of the UK economy. However, despite acknowledging greater uncertainty about the future, and some will be feeling the pinch more than others, there is still an underlying feeling of positivity (more than half of respondents to a Lloyds Bank monthly survey of its customers ‘feel fairly upbeat’ about their own personal circumstances). Are we missing something?

We all notice when the cost of fuel goes up – this is one of the main drivers of the CPI – but with wages not keeping pace with this level of inflation, why are we apparently not noticing it so much when we go to the supermarket, for example?

Well, that’s partly down to supermarket and food manufacturer tactics – where they ‘lose’ the increases and make them less obvious to consumers. They can do this on items we don’t buy often, such as light bulbs, plants or cigarettes: we probably just take a breath and comment on the price of them but not think much more about it. If our weekly shopping bill is slightly larger, we put it down to those less frequent purchases.

But they have other tricks up their sleeves too – the shrinking package.

Remember the collective outrage when the gaps between Toblerone triangles increased? Or the annual seasonal muttering about creme eggs and, more recently, Terry’s Chocolate Orange? It pays to keep an eye on all pack sizes. Their unit costs don’t change but what you get for your money shrinks. A litre of petrol can’t alter so you notice the price rise immediately.

But inflation doesn’t just affect the consumer. Those same manufacturers and retailers are feeling the pinch through higher inventory costs so they have to find different ways to retain their profit margins by more than just price rises on treats. So this is likely to impact on the workforce through perhaps lower bonuses or increased canteen costs etc.

Inflation will also affect your investments – if you’ve invested in bonds, inflation is your worst enemy as it erodes the purchasing power of future coupon payments, and so to compensate you will see a decrease in the capital value on your fixed interest investments.