UK avoids triple dip - but inflation still a concern

UK avoids triple dip - but inflation still a concern

30 April 2013 / by Oliver Roylance-Smith

The latest figures from the Office for National Statistics mean that the UK has avoided falling into a triple dip recession. But what does this really mean for the economy going forward and what part might inflation play when deciding what to do with our money?

Recession latest

The UK has narrowly avoided a triple dip recession, according to the Office of National Statistics (ONS). The ONS stated that its initial estimate for gross domestic product (GDP) showed the economy grew 0.3% during the first quarter of 2013.

The growth in GDP means that the UK economy has narrowly avoided two consecutive quarters of shrinkage, and thus has escaped falling into a third recession in five years. The Coalition government welcomed the findings with the Chancellor, George Osborne, stating that the findings were “an encouraging sign the economy is healing.”

Meanwhile, Business Secretary Vince Cable displayed a cautious optimism in relation to the latest ONS findings, commenting that: "The figures are modestly encouraging and taken alongside other indicators, such as employment figures, suggest that things are going in the right direction.”

Nothing to write home about

Despite this ‘better than nothing’ approach from Coalition members, it’s clear that a quarterly growth of 0.3% is hardly an inspirational figure. To put it into context, most economists would usually expect around 12% growth over any given five-year period. What we’ve had instead, according to Tony Dolphin, chief economist at the Institute for Public Policy Research, is an economy that’s "stuck in a rut". He continues: “Almost 15% of potential output has been lost, along with the employment opportunities and tax revenues that would have accompanied it.”

Adding a further caveat to its findings of growth, ONS stated that GDP "has been broadly flat over the last 18 months". What’s more, the overall economic output remains 2.6% below its pre-crisis peak in 2008. The shadow chancellor, Ed Balls, commenting on this point, said that the economy was "just back to where it was six months ago".

Furthermore, while the latest Consumer Price Index (CPI) may have remained steady at 2.8%, the rate of inflation facing many savers and investors, particularly those from the older generation, is much higher, according to research from Alliance Trust.

The elderly hit the hardest by inflation

In March 2013, the Alliance Trust Economic Research Centre has found that those aged 75 and over experienced the highest rate of inflation for a third consecutive month. The elevated rate of inflation experienced by the elderly is partly due to continued increases in electricity and gas prices. Increases in these categories disproportionately affect the elderly as they allocate a higher proportion of spending to these areas – something I think many of us can relate to…

According to chief economist Shona Dobbie, over 75s spend relatively more of their budget on basic goods and services, which have pushed their inflation rate higher in recent months. It’s estimated that the over 75s spend nearly a quarter of their budget on basics such as food and fuel. Figures from the Office of national Statistic suggest that energy bills alone cost each retired household around £1,500 per year.

The need to plan ahead

But it’s not just over the oldest members of society who feel the weight of inflation. The true increase in the cost of living is being felt by all consumers and even though this is proving a challenge for households week on week, the real impact this has is over the medium to longer term.

The over 50s, who often rely on their savings more that the younger generation, fall well and truly into this camp. Whether you’re looking to invest to boost your retirement income or are already retired and want to make the most of your savings, it’s essential to take into account the impact of inflation, not just over the next 12 months, but also in future years to come.

Inflation should be on everyone’s mind

In these turbulent economic times, it’s clear that whatever stage of life we’re at, there are no real winners when it comes to beating inflation. We may have evaded the threat of a triple dip recession, but prospects for savers and investors alike are hardly enticing with competitive returns with the potential to beat inflation being hard to find.

The threat of inflation on our income and capital is something which we must all be aware of. Understanding the impact this can have, even over a short period, is more important now than ever before, and the threat of inflation should be a primary consideration when deciding what to do with our hard-earned money.

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