Will inflation keep rising in 2022? Discover what you need to know

According to the Office for National Statistics, inflation in December 2021 reached the highest level for 30 years, standing at 5.4%. Furthermore, the Bank of England predicts it could continue to rise as we head further into 2022.

Inflation has the potential to reduce your wealth in real terms and, as Britain heads towards the third year of Covid, it’s an unwelcome twist in the ongoing pandemic.

So how much higher could inflation rise and how could it affect you? Read on to discover more, and how you may be able to inflation-proof your money. Before we consider this though, we need to understand what inflation is and how it works.

Inflation is the rising cost of goods and services 

In short, inflation measures the rise in the cost of living. While a small increase typically points to a healthy economy, if it’s too high and your money is not keeping up, it has the potential to reduce your wealth in real terms.

If you use an inflation calculator, you’ll see that in January 2022 you need £134 to have the same spending power as £100 in January 2012. This means your money had to increase by 34% during the period just to keep pace with inflation, which averaged 3% a year.

This is significantly below today’s inflation rate, so let’s look at why inflation has risen so sharply.

Pent up spending and energy prices helped push up inflation

According to the Bank of England (BoE), the rise was partly down to the economy recovering so quickly after the Covid restrictions. One reason for this was people going out to shop and socialise, and thanks to lockdown savings, many people also having more money to spend.

Another reason for rising inflation was supply, with businesses selling products experiencing problems in getting enough to sell on to customers. You might remember the shortage in computer chips, which caused particular issues in the manufacturing of a range of goods, including cars.

Added to this was a sharp rise in energy (oil and gas) prices that also pushed up prices for many consumables as they became more costly to produce. So, against this backdrop, the question you may now ask is: how much more could inflation rise?

Inflation is expected to reach 6% in 2022

Back in the 1970s inflation reached 25%, although it’s very unlikely we’re going to see anything close to those levels. The BoE suggests inflation will be around 6% by spring 2022, and expects it to fall to around 2% in the latter half of the year.

This could affect your household finances though, as inflation impacts on everything from the cost of  your weekly shop to the amount you pay for your utility bills. So, let’s now consider how you might protect your wealth from inflation’s effects.

An interest rate rise is unlikely to inflation-proof your money

In response to rising inflation, the BoE increased the base rate to 0.25% in December 2021. A recent report by the Guardian suggests analysts predict this will rise to 0.5% in February 2022 and then rise to above 1% by the end of the year.

While on the face of it, this is good news for savers, it still means interest rates are likely to remain significantly below the rate of inflation. This is especially true when you consider that the Times reveals that some banks have not even passed December’s rise on to customers.

The good news is that there may be a solution. Research has shown that, typically, investing your money exposes it to greater long-term growth, which could protect it against inflation.

According to the Barclays Equity Gilt Study, the stock market performed significantly better than cash between 1899 and 2019. It not only found that stocks and shares had outperformed cash in 91% of 10-year periods, but it also showed that £100 invested in equities in 1899 would have been worth £2.7 million in 2019.

The study, which tracked the nominal performance of £100 invested in cash, bonds or equities during the period, found that the same amount invested in cash would have been worth around £20,000.

The most important thing to remember when investing is that it is a long-term venture. Typically, you should not invest for less than five years, and working with a professional financial planner means that you will understand the investments being made, as well as the risks and potential rewards.

Get in touch

As a client of HarperLees, your money is likely to be in investments that could help inflation-proof your hard-earned money. If you would like to discuss the potential effects of inflation or using investments to help protect cash that’s currently in savings, email us at info@harperlees.co.uk or call 01277 350560.

We’d be very happy to help.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.