UK inflation is beginning to rise more sharply than the Bank of England expected. According to statistics issued by the Office for National Statistics (ONS), it rose from 2.1% in May to 2.5% in June. It is the highest inflation has been since August 2018.
The increase in inflation is being driven by the economy’s recovery from the coronavirus pandemic. Below is a summary of how inflation has risen since the beginning of the year.
- 0.7% – January 2021
- 0.5% – February 2021
- 0.7% – March 2021
- 1.5% – April 2021
- 2.1% – May 2021
- 2.5% – June 2021
The BoE’s inflation forecast for June was 2%, so it is departing further and further from their predictions. Their estimate for inflation by year-end is 3%. But according to the BoE’s chief economist, Andy Haldane, he believes that inflation could reach 4% by the end of the calendar year.
Fears of Inflation Trouble Savers
From an economic recovery point of view, this forecast bodes well in terms of the UK’s economic recovery. But it will worry savers and investors. That concern is further fuelled by reports that the governor of the BoE, Andrew Bailey, is set on playing a wait-and-watch game. In the meantime, savings are losing value in real terms.
By keeping the base rate low, the BoE seeks to do two things – keep inflation in check and boost economic growth. The other weapon the central bank has at its disposal is something called quantitative easing.
The Introduction and Rise of Quantitative Easing
Quantitative easing (QE) is when the bank buys bonds to keep interest rates on loans and savings low. It is something that was first introduced in 2009, following the world economic crisis in 2008. Over the years, it has steadily increased as you can see below.
- £200 billion – November 2009
- £375 billion – July 2021
- £445 billion – August 2016
- £645 billion – March 2020
- £745 billion – June 2020
- £895 billion – November 2020
QE has quadrupled since it was first used and has doubled since the beginning of the COVID-19 pandemic.
The City is at Odds with the Central Bank
It is not just savers who are concerned over Andrew Bailey’s wait-and-see approach. The city is not too happy either, especially with the level of QE. They argue that printing more money in this fashion could fuel inflation, and they would rather see a rise in the base rate.
The ongoing pandemic could cause inflation to rise. Increasing staff shortages are becoming a problem and could lead to wage increases. On top of that is the likelihood that UK citizens, who have amassed around £180 billion in terms of excess savings, will go on a mass spending spree. While that may be good for the economic recovery, it is another potential feeder of inflation.
Another serious worry is government borrowing, not just here in the UK but all over the world. While the UK government has borrowed £2.2 trillion, an alarming 99% of GDP, borrowing in the US is at 105% of GDP, and in Japan, it is an incredible 266%. It threatens to erode the value of fiat currencies.
One of the things we are looking at in this article is alternatives for savers and investors – ways of making sure their savings or investments at least keep pace with, if not better, inflation.
Tally Arrives in the UK
Tally is an alternative bank and currency that links gold not to sterling, but to a bank account. One unit of Tally is tied to one milligram of gold.
You use Tally like an ordinary bank account. You can pay money into your account via an app and use your Tally debit card to withdraw cash at ATMs. Because it relies on gold and not a fiat currency for underpinning, it is hailed as a much safer kind of banking. It is supposed to protect the saver’s money from the ravages of inflation and dropping interest rates as national debt explodes.
Tally is still subject to daily fluctuations as with any currency. However, because it is linked to gold, it is much more stable. Over the last 20 years, the value of gold has increased by more than 600%, whereas viewed another way, sterling has devalued 87%.
Traditional Stocks and Shares ISAs
It will be interesting to see how Tally fares in the coming years. In the meantime, investors who would prefer to stay with more traditional savings vehicles have the option of putting their savings into Stocks and Shares or Investment ISAs.
They have been proven over the years to provide good returns that significantly outstrip inflation. For anyone who is not risk-averse and is willing to save long term, they are still one of the best investment vehicles on the market.