Inflation falls slightly to 6.7%
- 21 September 2023
- 5 mins reading time
On Wednesday 20 September 2023, the Office for National Statistics (ONS) released the latest inflation figure, which came in at 6.7 percent (1). This is a slight fall from last month’s 6.8 percent, and surprised market commentators who expected the inflation figure to rise this month.
The ONS stated that the main driver for the fall was the cost of food, driven by dairy products. The largest price increases were in the cost of fuel for motorists, due to some big exporting countries announcing that they would be cutting the supply of oil.
What does this mean for today’s interest rate decision?
However, the Bank of England (BoE) pays more attention to core inflation when making its decisions about interest rates. Core inflation strips out the effects from energy, food, alcohol and tobacco, and this measure actually fell more than expected this month.
The Bank of England (BoE) announced it is holding interest rates at 5.25 percent, after 14 consecutive interest rate increases.
Bank of England Governor Andrew Bailey said: ‘Inflation has fallen a lot in recent months, and we think it will continue to do so.’ He added ‘But there is no room for complacency. We need to be sure inflation returns to normal and we continue to take the decisions necessary to do just that.’ (2)
2% still a long way off
We shouldn’t get complacent about falling inflation. Inflation is still high – the UK is an outlier for inflation compared to other major economies. The important target is the BoE’s 2 percent, which is what they deem appropriate for a healthy and growing economy, without prices rising too fast for consumers to cope with. Until we get much closer to this target, it is likely that interest rates will remain high.
What does this mean for savers and investors?
The slow progress in getting inflation close to the 2 percent target means that we are likely to remain in a high inflation, high interest rate environment for the short term.
In financial planning terms, the short term could mean anything up to five years (medium term being five to ten years, long term being ten-plus years). Five years may feel wrong to class as short term, but when we think about financial planning, we want to plan for the financial goals at all of your life stages. For example, a long-term goal would be retirement, which could be several decades away, a medium-term goal could be helping children through university – perhaps eight years away, and in the shorter term, maybe moving to a bigger house - possibly four years away.
Now, we are not saying that we think it will take five years for us to reach the 2 percent inflation target! What is important, is to understand how the current economic environment could affect your financial goals, and that there could be investment decisions to consider now to make sure that you stay on track with your financial plan.
Time to check-in, but not make knee-jerk decisions
As we move towards the end of year, it is looking like the higher inflation, higher interest rate environment will be with us for longer than many may have anticipated at the start of the year. So, if you revisited your plan early in 2023, you may have made some assumptions about the year ahead that aren’t looking so likely now.
A sound financial plan won’t need constant tinkering for shorter-term economic changes, but if you haven’t checked in with your adviser recently, now could be a good time to revisit your finances.
Check that the level of risk you are able and willing to take is correctly reflected in your investments, and that your portfolio is as fully diversified as it can be to help mitigate headwinds such as higher inflation. Diversification means spreading your money across a large number of different investment types. Different investments react to inflation (and other factors) in differing ways; having a spread of many types of investments means that you lessen the risk of one type performing badly and affecting your whole portfolio.
(2) BBC.co.uk, ‘Bank of England leaves interest rates unchanged in surprise move’, 21 September 2023.
The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor might not get back their initial investment.
There is no guarantee by investing money it will keep level or beat inflation, particularly when inflation is high.
Forecasts are not a reliable factor of future performance.
Any views expressed are our in-house views as at the time of publishing.
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