The Governments Office of National Statistics (ONS) has put out data to show that the current level of inflation in the UK is now at 1.1%, up from 0.9% in May.  While that may not seem a huge amount of change, the growing impact of inflation can have long term ramifications to business and home life.

For a start, inflation isn’t just a home-country based problem, and if the inflation rate in one country rises faster than in other countries. with which the first country does business, then the cost of goods between the countries can become prohibitive. While that might seem fairly bad for business, the bad news doesn’t end there. High inflation rates mean that banks will raise interest rates in order to dampen the economy, and that too will hit companies that have loans and other finance.

So, business will fare quite badly as inflation rises, but what about other areas of the economy?

Cost to consumers.  Inflation will start to affect the price of almost everything that consumers want to buy and will mean that they will start to put off all but essential purchases such as food and clothing. Increased prices in shops will drive consumers towards lower prices online and reduce revenue to shopping centres and urbanised areas, and further diminishing them.  

Cost to workers. Because it takes a heavy toll on businesses, increased inflation can have a profound effect on jobs and workers too. If companies are unable to sell goods together with increased interest rates, they may start to shed jobs as production slumps.  Workers who retain their jobs will also find that their wages simply don’t go as far as previously, and there will be little chance of a pay rise to help bridge the gap. 

However, the converse can also be true, and if a rising inflation rate is caused by confident consumers increased spending, then businesses may take on more workers, and increase salaries to attract the right people into jobs.

Cost to savers. Savers are the one group who are keen to see a rise in inflation since it tends to drive up interest rates and that will give them a greater return, particularly if their investment is index linked. However, in non-index linked investments, investors could see a smaller return than they expect; If inflation rises to an eye-watering 7%, and their investment is pegged at a lower figure – say, 3% – by their investing institution, then savers effectively lose 4% investment in real terms. However, many banks and building societies are likely to offer some good interest rates in order to attract new customers.

Cost to borrowers. This is easily the biggest home market that sees the effects of rising inflation, since the UK has a very active borrowing market both in terms of mortgage loans and personal lending. One again, inflation-driven interest rates become the main issue, particularly on large-scale borrowing such as mortgages.  People with a fixed-rate mortgage would be shielded from the immediate effects of interest rate rises, but those on variable-rate tracker mortgages could start to see sharp rises in repayments.

If you are concerned about inflation and its effects on your finances, come and talk to us at Grange Mortgages and discuss your financial needs.