Inflation in UK in 2023

In recent months, there has often been talk of rising energy prices and, in general, of rising prices. In addition to being linked to the long period of the pandemic and the ongoing conflicts, the increases also depend on the increase in inflation resulting from recent monetary policies. When considering the various expenses, be they of a family or a company, the inflation factor must always be taken into consideration. The economic meaning of this word concerns a general and constant growth of prices over time.

What is inflation in simple terms?

Since the prices of goods and services undergo continuous variations in the market economy, inflation is a fundamental indicator because it conditions the purchasing power of households as well as the orientation of the monetary policies of the central banks. Due to inflation, there is a reduction in the value of the currency over time, therefore, for example, with one euro I will be able to buy fewer goods and services today than in the past.

The following can contribute to influencing inflation:

• the growth in the production costs of goods and services, driven by the increase in the prices of raw materials or labor costs;
• an increase in the demand for goods and services that exceeds the possible supply at a given moment and which, therefore, drives up prices.

HOW IS INFLATION CALCULATED

The calculation of inflation is based on a consumer price index (indicated by the acronym "IAPC") measured in Italy by Istat (National Institute of Statistics) on the basis of the costs of a set, called the basket of goods and services, representing household consumption. The basket includes, for example, the prices of clothing and footwear, food, transport, electricity and other products. In summary, therefore, the following are considered part of the basket:

items of daily use (such as food and fuel)

durable goods (clothing, electronics and appliances)

services (e.g. rentals and insurance)

The annual rate of inflation corresponds to the price of the total basket in one month compared with the same month in the previous year.

Inflation in UK in 2023

UK inflation is calculated using the Consumer Price Index (CPI) which measures changes in the prices of goods and services.The CPI measures the change in price from the consumer's point of view.

It is a key tool for measuring changes in purchasing trends and inflation in the UK. A higher-than-expected reading should be interpreted as a positive/bullish signal for the British Pound (GBP) (as the most common tool to fight inflation is rate hikes, which can attract foreign investment), while a lower than expected should be interpreted as a negative/bearish signal for the GBP.

Disappointing inflation data arrives in the UK in March 2023. According to the monthly report of the Office for National Statistics (ONS), consumer prices mark a growth of 10.1% on an annual basis, recovering from the +10.4 % of the previous month and at the +9.8% expected by analysts. On a monthly basis, inflation recorded an increase of 0.8%, after the +1.1% of the previous month (+0.5% expected).

The core inflation figure, which excludes the more volatile components such as food and fuel, rose to +6.2%% against +6.2% in the previous month (+6% expectations). On a monthly basis, +0.9% was recorded (+0.6% market expectations) and compared to the previous +1.2%.

How to protect yourself from the effects of inflation on investments

One of the primary ways inflation affects investment decisions is its effect on interest rates. When inflation is high, central banks tend to raise interest rates to reduce consumer spending and borrowing, which in turn leads to lower inflation. High interest rates make borrowing expensive, reducing investment and consumption. On the other hand, low interest rates tend to stimulate consumer spending, reduce savings and encourage borrowing, which can lead to more investment in the economy.

Furthermore, inflation can also affect investment returns indirectly through its effect on the economy. This is especially important for investors in stocks and bonds. High inflation leads to an increase in production costs, with a consequent reduction in the profit margins of companies. As a result, stock prices can fall and bond yields rise, which can be unappealing to investors. Investments in real estate and commodities such as gold or silver can act as a hedge against inflation, as their value tends to increase with the rate of inflation. This type of investment can also be made through regulated online investment platforms.