The headlines over the last year, since the leaving of Liz Truss and her tumultuous short reign, have been dominated by inflation and the methods that the Bank of England has been using to try and stop it from rising. Since 2008, following the global crash of the banks and lending market, national financial institutions and departments set their interest rates at record lows. Many of the official financial offices set them at near zero or just above it. For those of us with credit and mortgages, this was excellent news as it meant that the interest we were charged on the money we had borrowed was low, so this lending didn’t cost as much. It also meant that the money that banks, building societies, and financial institutions could buy from the Bank of England was cheaper, meaning that they could sell this money to us as loans, mortgages, and credit cards.
One of the most affected parts of the economy has been that of mortgages. Many borrowers will have been on standard variable rates that were so low we didn’t see the need to ring the bank and fix a rate. However, now that rates have risen, to combat rising inflation, many are finding themselves on much higher payments, although many commentators have pointed out the current Bank of England rate is now at an average level to where it was before the crash. It has been higher. At one point in the 1980s it was at 15%!
Much has been made of the rise in wages as being the driving factor. The company payroll manager has certainly been busier than before. Wages and prices are linked and the government and institutions that control the economy are always trying to strike a balance between the two. What worries governments is that if wages rise too fast then our buying power will increase. This means that the demand for goods will also increase and then prices start to rise. It follows that wages have to grow to deal with the cost of living and this then fuels another increase in buying. Interest rates are used to curtail our spending by making credit and mortgages more expensive, leaving us with lower disposable income. As the demand for products and services drops, the price of goods and services should come down. It also means that the value of the money we have is retained.
So what other financial factors are affected? When the payroll manager sends out the okay for the wages to be paid, what is the workforce then looking to spend it on? We have already spoken about how our spending is being curtailed and we can’t afford the things that we would like straight away. This is part of the plan of the central institutions to try and make us save more or hold onto our money for a while longer before we make any great purchases.
There is another reason for this, inflation is also responsible for the erosion of the value of savings. If interest rates are below the rate of inflation it means that you lose money as the savings and the interest accrued do not keep pace with the price of the items that you are saving for. However, the rise in interest rates is good news for savers as it means the rates on their savings accounts will rise so that what they do save begins to see a better return on the investment.
One of the biggest criticisms of the use of interest rates to control inflation is that those on lower incomes are disproportionately affected by the change over others in society. Those who are well off may well see a shrinkage of their income but this is not as great a strain as those whose income is mainly devoted to the payment of household bills and priority spending. As the payroll manager organises the monthly wage bill, British households are looking through the costs they have and budgeting accordingly. The increases in council tax, energy, fuel, and food costs have already put a tremendous strain on the family income. Add to this the increase in mortgage rates, and the rising price of rent, and it means that the threshold of surplus that families and the lower paid have is greatly reduced. This is true as you move up the scale of pay. Unfortunately, this is interpreted that the only way to slow inflation is by curbing the spending of those who can least afford to do so in the first place. Even worse, it creates a situation where inflation means that most standard of living costs become impossible to meet.
Avoiding this scenario means that households have to juggle the income that they have and begin to make sacrifices. By budgeting wisely, families can see their way through the turmoil or “stay the course” as the Prime Minister suggested. For those that could, investing in stocks and commodities that are consistent performers would be a great idea but sadly, very few have the domestic surplus to be able to do this. Householders need to focus rather on any high-interest debt, such as credit cards or loans, as they can become a real drain on income as the rates rise. These are affected by the change in interest rate meaning that these debts take longer to clear. Another option that the current government is keen on is that families take on other jobs to supplement their income. Running a part-time job after you’ve finished a full-time one, is a great source of extra income for the home. Many people are also using second-hand online clothing retailers to buy and sell new garments or their possessions that they no longer have any need for, or can do without.
At the end of the month, the most popular person in the office should be the payroll manager, but this may no longer be the case! It’s demoralising to receive a paycheck and know that, once the bills are paid, there’s not much left.
At Core3, we are committed to doing our absolute best for our clients, candidates and staff, and we will always try to secure the very best deals in their best interests. We are also committed to doing our utmost towards making a difference in our community. All the doom and gloom we hear in the news makes us even more determined to use our business as a force for good. If you are a business leader and you would like to join us and make your company a force for impactful change in the community then why not tune in to our Conscious Finance Podcast and find out how.
