- August 18, 2023
- Posted by: pr_finance
- Category: Investment
Inflation – a word that’s been dominating headlines lately. The rate at which prices are rising has been a matter of concern for governments, economists, and the public at large.
Recently, the UK’s inflation rate fell to 6.8% in the year to July, a slight decrease from 7.9% in June.
This blog explores the current inflation situation, how it’s measured, its causes, and its effects on various sectors.
We’ll also explore the relationship between inflation and the UK property market and how this economic phenomenon could offer property investors opportunities.
At its core, inflation refers to the increase in the price of goods and services over time. If, for instance, a milk bottle costs £1 today costs £1.05 a year later, the annual milk inflation rate is 5%.
The Office tracks the UK’s inflation rate for National Statistics (ONS) through a “basket of goods” – a selection of everyday items whose prices are monitored to reflect shopping trends.
The Consumer Prices Index (CPI) is the primary measure used to gauge inflation, and it stood at 6.8% in July, down from 7.9% in June.
Causes of Rising Inflation
Several factors contribute to rising inflation, and in the UK’s case, soaring food and energy bills have played a significant role. The post-Covid return to normalcy led to increased demand for oil and gas.
Simultaneously, conflicts like the war in Ukraine disrupted energy supplies from Russia, placing additional pressure on prices. The global food market was also affected, as the war reduced the availability of essential crops like grain.
In the UK, a shortage of salad and vegetables in February further propelled food inflation to a 45-year high. Additionally, alcohol prices in restaurants and pubs experienced an increase.
Role of Interest Rates in Inflation Control
The Bank of England has traditionally raised interest rates to combat high inflation. This move makes borrowing more expensive, resulting in higher monthly mortgage payments for some individuals and increased saving rates.
By reducing disposable income, consumer spending decreases, leading to reduced demand for goods and a slowdown in price hikes. Moreover, businesses tend to borrow less, potentially resulting in job cuts and decreased job creation.
In June, the Bank raised interest rates for the 14th consecutive time, reaching a main rate of 5.25%.
Impact on Wages
The relationship between wages and inflation is crucial. While regular pay grew by 7.8% between April and June compared to the previous year, inflation-adjusted figures indicated a decline of 0.6%.
Many workers and unions have advocated for wage increases that reflect the rising cost of living. However, the government’s concern lies in the possibility that substantial pay rises might exacerbate inflation, causing companies to raise prices further.
The Property Market Connection
So, how does inflation relate to the UK property market, and why might it intrigue property investors?
In times of inflation, money’s value decreases, which can have a notable impact on real assets like property.
While the initial reaction might be negative due to increased costs, there are potential benefits for property investors.
Property, particularly residential real estate, can hedge against inflation. As prices rise, so does the value of property assets.
Historically, real estate has proven to maintain its value over time, often outpacing the inflation rate.
Property investors can leverage this characteristic to protect their investment portfolio from the erosive effects of inflation.
Rental Income and Demand
In an inflationary environment, rental income tends to increase. As the cost of living rises, so do rental rates, enabling property investors to earn higher yields from their investments.
Property demand might remain steady or even increase during inflation as people seek stable assets like real estate to safeguard their wealth.
This heightened demand can contribute to property appreciation and, subsequently, higher investor returns.
Leveraging Financing Opportunities
Property investors can capitalize on inflation by leveraging financing opportunities. As interest rates rise to combat inflation, fixed-rate mortgages secured earlier can offer significant advantages.
Investors can enjoy lower interest rates on their loans while benefiting from the appreciating value of the property.
This dual advantage can amplify returns on investment in an inflationary economy.
Though often viewed with apprehension, inflation can present unique opportunities for property investors in the UK market.
While its effects ripple across various sectors, the property has shown resilience as a potential inflation hedge, providing investors with increased value, rental income, and financing advantages.
As the UK navigates through its current inflationary period, those considering property investment should explore the potential advantages this economic phenomenon could bring to their investment portfolio.
However, as with any investment decision, careful research and consideration of market trends are essential before making any investment commitments.
Navigate inflation’s impact on property investment with Max Property Finance. Let our experts guide you through smart strategies for maximizing returns in today’s dynamic market. Get started now!