Outlook for Inflation 2022 to 2024
Published / Last Updated on 25/11/2022
We are all experiencing the difficulties of cost-of-living inflationary increases including energy prices and interest rate rises affecting our mortgages, debt, and credit cards. In addition, savers will not benefit from finally getting interest on our savings, but first-time buyers will be struggling even further to complete on any new mortgage or meet higher affordability tests.
We forecast inflation to ease down from the current 11.1% pa, may be not straight away, so they may rise in November’s figures, due out in December, but we expect them to fall in 2023 and again in 2024.
Make no mistake though, whilst we forecast inflation to fall back, this does not mean prices are going to fall, we suggest prices are going to stabilise and not increase as much in the future but will remain at current high levels.
Future Inflation Indicators:
Fuel pump prices have fallen compared to their summer highs.
Home energy prices have doubled but with a cap for the average user of £2,500 pa rising to £3,000 pa next year, there will be an increase in energy costs. The ‘Iron Curtain’ has fallen again, so whilst Europe’s reliance on Russian oil and gas will fall, it really means that demand for energy from other sources e.g., the ‘Americas’ and the Middle East or other fossil fuel nations will rise, keeping prices high. It is going to take a decade and more before renewable and green energy is the major source where relative prices may fall. High energy costs are here for another decade.
Food prices will remain high. A weak pound pushed food imports to higher levels than the rest of the developed world, but the pound is recovering and getting stronger, food import costs will be lower.
Wage demands due to cost of living will push wages higher with a knock-on effect that this well also then keep prices higher as we have a little more money to send. In the same way, inflation linked pensions and benefits will also act to keep prices higher rather than falling.
Without the energy prices crisis, in part caused by Russia/Ukraine conflict, our inflation would still be around 6-7% pa.
Governments Need Inflation
We have suggested many times in this video blog and our news articles that governments need inflation to devalue covid-19 and now cost of living debts. The UK borrowed over £500bn to pay for covid-19 and there is now a further blackhole of some £60bn to £70bn to pay for cost-of-living grants, energy price grants and more.
Think of government debt like an ‘interest only mortgage’. You borrow money and only pay the interest on the mortgage debt. At the end of the mortgage term, the original mortgage capital borrowed is due to be repaid e.g., after 25 years. This is the same for government debt. 75% of UK government borrowing is on fixed rate borrowing, just like an interest only mortgage and is due to be repaid in say 25 or 30 years. The government’s ‘unsaid’ approach is to allow inflation to run, say at 5% pa over a 10-year period, cumulatively will devalue debt by 63%. Then, if inflation runs at 2% pa for another 15 years, this will mean fixed rate debt has been devalued by 85%. When covid-19 debt is due to be repaid in 25 years, it will only be 15% of the equivalent total debt cost in real monetary terms.
Therefore, governments around the world are doing nothing to reduce the real costs of living by reducing duties, levies or taxes but are giving us all grants and even more for low-income households.
Inflation Outlook
The Bank of England forecasts that inflation to fall back to trend target of 2% pa by 2024. We suggest not, we believe it will fall but be around 4-5% pa on average across the decade from 2020 to 2030. Interest rates will likely increase again but will then fall back to ‘historic’ levels of around 2-3% pa for Bank of England base rates with mortgage borrowing costs of 6-7% pa.
Spread Your Risk
Different countries are at different points of their inflation cycle (with added energy costs), the spread your risk we suggest your investment portfolios should be spread wide and not focussed on certain markets i.e., do not focus your portfolio on Europe, UK, North America, Far East or Emerging Economies, spread it widely across then all.
