Inflationary Concerns

The UK Consumer Price Index saw a rise in the annual rate for January 2010, from 2.9% to 3.5%. Despite the longest recession since World War II, talk has already turned to the future - and the worry that inflation could take hold if the fiscal stimuli used to try and prompt recovery stay in place too long.

Inflation has been low for a while now. Back in the late 80s and 90s, monthly inflation figures were much higher - peaking at 8.5% in April 1991. But some will remember the economic slump of the 1970s, which was triggered by double-digit inflation - and may be nervous.

As recently as mid 2008, we saw inflation around 5%, driven by energy costs and higher prices for vegetables, furniture, and cigarettes. House prices and housing costs also impacted. This threat passed as the recession extended and the Bank of England and the Government put a lot of new money into the economy to try and encourage some growth. However, they now need to be careful how this works through or inflation could easily take hold again.

At the moment, there is probably less reason for concern than in the 1970s and early 1980s. The economic outlook is still nervous as lower than expected, growth in Q4 2009, despite confirming an end to the recession for now, could indicate that growth might halt again as consumers consider tightening up on spending after the Christmas spree. Whatever happens next, however, it is a timely reminder to review and inflation-proof your portfolio, just in case.