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UK Inflation hits 32-year high at 9%. What to expect next?

On May 18th 2022, the UK Consumer Price Index (CPI) for the month of April rose by 9% as reported by the Office for National Statistics, 7% higher than in the month of March.

What is CPI?

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services (such as food, transportation, and medical care). It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.

In short:

  • If CPI > positive = inflation
  • If CPI < negative = deflation

The changes in the CPI are used to assess price changes associated with the cost of living.

What does this all mean?

UK inflation has climbed to a new 32-year high which means increased energy costs, fuel bills and food prices are at their highest in decades. A record surge in fuel prices pushed inflation to 9% in April as consumers feel the impact of quantitative easing and rising interest rates.

April 2022 had the highest inflation since June 1991

Per cent change in Consumer Price Index from a year prior:

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 7.8% in the 12 months to¬†April 2022, up from 6.2% in March.

The largest upward contributions to the annual CPIH inflation rate in¬†April 2022¬†came from housing and household services (2.76 percentage points, principally from electricity, gas and other fuels, and owner occupiers’ housing costs) and transport (1.47 percentage points, principally from motor fuels and second-hand cars).

On a monthly basis, CPIH rose by 2.1% in April 2022, compared with a rise of 0.7% in April 2021.

The largest upward contributions to the change in the CPIH 12-month inflation rate between March and April 2022 came from housing and household services (1.27 percentage points), restaurants and hotels (0.11 percentage points), recreation and culture (0.10 percentage points), with the largest partially offsetting downward contribution from clothing and footwear (0.09 percentage points)

The Consumer Prices Index (CPI) rose by 9.0% in the 12 months to April 2022, up from 7.0% in March.

On a monthly basis, CPI rose by 2.5% in April 2022, compared with a rise of 0.6% in April 2021.

What to expect next?

The CPI is one of the most frequently used statistics for identifying periods of inflation or deflation which is the rate at which prices are rising. For example, if the cost of a £1 jar of jam rises by 5p, then jam inflation is 5%.

You may not notice low levels of inflation from month to month, but in the long term, these price rises can have a big impact on how much you can buy with your money. As such, consumers might look at moving their wealth into other alternative investments to negate the effects of relatively high inflation.

Some crypto industry experts argue Bitcoin may act as a perfect hedge as it can be uncorrelated to traditional markets and asymmetric in return over long periods of time due to its deflationary nature. However, other traditional industry experts argue that Bitcoin is a highly volatile and speculative asset that makes it a risky investment if you don’t understand the crypto asset market. At the time of this email, Bitcoin is at $29,853.50.

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