Written by Patrick Ingram, Retirement Specialist 27th August 2019

The average adviser is, so they say, 56 years old.

They will remember the 1970s when inflation hit 26% and their two shillings a week pocket money was suddenly worthless, even when converted into decimal.

Figure 1: RPI All Items: Percentage change over 12 months: Jan 1987=100

But for the last decade, inflation has been off the agenda.

Price rises have been subdued in comparison to the 70s and 80s.

Low interest rates have meant lower mortgage costs, helping avoid wage increase pressures that lead to higher prices.

Changed days

Of course, the standard measure of inflation has changed since the days of the Oil Crisis, the Three Day Week, and the first ever UK referendum, on joining the EU.

The Retail Prices Index (RPI) still determines the inflation rate for pricing linked gilts, many pension benefits and social housing rents, but the Consumer Prices Index (CPI) has become the preferred measure. This is the one everybody hears about in the news.

There are big differences between the two.

RPI includes a measure for housing costs - CPI doesn’t.

There is a measure of CPI designed to help bridge the gap, called CPIH, which adds in the Owner Occupier Household (OOH) prices series and Council Tax, but this is not part of regular CPI. And that’s despite the fact it’s the measure the Government target when they speak of inflation control.

July’s CPIH figures show that the largest contribution to price increases came from housing costs. There were no major areas helping to pull prices down, as the fall in clothing costs did earlier in the year. Everything is on the up.

Figure 2: Largest contribution to inflation continues to come from housing and household services

What risk to prices from Brexit?

The prospect of a hard Brexit would likely bring a drop in the value of the pound - some commentators suggest it could well reach parity with the dollarÂą.

We believe recovery will come once the shock has faded and businesses recover their composure, learn to handle new forms and the new admin, and we learn where our available export markets really are.

Inward tourism, our education sector and the City are likely to carry on as before, maybe even with a lift from a weaker pound. But a spike in energy costs and food traded in dollars (wheat, chocolate, coffee etc) could be expected – and that could really impact on living costs for the elderly.

Plan for a heavier basket

The headline numbers for inflation are comprised of weighted series of baskets of costs for food, leisure services and so on. The make up of the overall basket changes over time, but in July 2019’s CPIH the single biggest weighting is given to household bills, light, power and heat. This makes up 30% of the total.

Unlike the RPI data set which maintains data series for specific groups of people, down to the single and double pensioner households, CPI weightings take a less transparent view on whose basket of goods and services is being measured. A very wealthy person will not be spending 30% of their income on household bills. We need to be considering the impact of these rises in core household costs on people in retirement.

Get on the front foot

So how do you support clients at or in retirement through a time of uncertainty?

Firstly, any assumptions that financial plans are based on should be founded on data intelligence and market insight, and as scientifically robust as possible.

Secondly, with inflation a potentially growing risk and retirement planning all about long term confidence, talking about outcomes in terms of today’s money is essential.

That’s where Parmenion’s Income Management Tool could be a real asset for your business.

IMT is powered by actuarial experts Hymans Robertson’s Economic Scenario Generator and draws on one of the most sophisticated data sets in the market. The projections in the IMT are adjusted for simulated future inflation and shown in real terms, so you can see their value in today’s money. It’s that real value of money approach that makes the output of long run plans easier for clients to understand.

That understanding can help build trust and confidence – even when nothing is certain. So if you’d like to see how the IMT can support your financial planning, please get in touch.

ÂąPound Could Fall To Parity with Dollar on Hard Brexit Concerns
Larry Elliott - https://www.theguardian.com/business/2019/jul/17/pound-could-fall-to-parity-with-dollar-on-hard-brexit-concerns

“The above article is intended to be a topical commentary and should not be construed as financial advice from either the author or Parmenion Capital Partners LLP. If a client wishes to obtain financial advice as to whether an investment is suitable for their needs, they should consult an authorised Financial Adviser. Past performance is not an indicator of future returns.”

Any news and/or views expressed within this document are intended as general information only and should not be viewed as a form of personal recommendation. All investment carries risk and it is important you understand this. If you are in any doubt about whether an investment is suitable for you, please contact your financial adviser.