Cost of living: how worried should we be?
The value of investments can go down as well as up and you may not recover the amount of your original investment. Past performance is not an indicator of future performance and should not be relied on as such.
With rising food and energy prices hitting homes, and Russia’s invasion of Ukraine making matters worse, we put today’s cost of living concerns into context.
The devastating human impact of Russia’s invasion of Ukraine is still, quite rightly, a key concern for people across the globe. But alongside the shocking effect it’s having on people’s lives here and now, more and more media stories are appearing about how it might impact the economy, with rising oil and grain prices fuelling higher living costs.
Here’s some important context that sits behind the headlines which you may find useful.
Economies still growing
It’s important to bear in mind that developed economies are still seeing growth, having experienced a healthy recovery coming out of lockdown in 2021.
The unemployment rate in the US and UK has fallen back close to the historically low levels we saw before the pandemic. And excess savings gathered through the pandemic are acting as a ‘consumer buffer’ from higher prices.
But energy is getting more expensive for now
We’re seeing higher energy costs partly because countries and companies are looking to replace their dependency on Russia for oil and gas. This is a challenge because Russia is the world’s third biggest oil producer and the second biggest natural gas producer.
While we won’t see solutions overnight, we have already seen long-term deals between western countries and other energy suppliers, such as the gas partnership between Germany and Qatar. We’re also seeing a more pressing shift to renewable energy although we recognise that this will also take time.
In the meantime, countries can dip into their strategic reserves if needed. The UK government has made clear that “like other countries, the UK holds oil stocks in the unlikely event of a major oil supply disruption”. We’ve already seen the US decide to release one million barrels of oil a day from their strategic reserves to help keep petrol prices down.
Prices were already going up due to post-pandemic growth
Inflation was already rising before Russia’s invasion. In the UK, inflation grew by 6.2% in the 12 months to February 2022 – its highest level in 30 years. This was partly due to the strength of consumer demand when economies were freed from lockdown.
Shoppers and markets recently got some help
- The UK government has already committed to giving millions of households up to £350 as part of its Energy Bills Rebate.
- In addition to the £9 billion set aside to help families with energy costs, UK Chancellor Rishi Sunak recently announced a number of moves designed to help households and businesses deal with the impact of rising costs.
- 0% VAT on solutions for green energy and energy efficiency
- a cut of 5p per litre to fuel duty for the next 12 months
- an autumn cut to business rates
Why a long-term perspective is important for investing
What’s most important is that the effects on markets caused by rising commodity prices (due to the invasion of Ukraine), are ‘known unknowns’.
Ultimately, Russia’s invasion will negatively impact short-term growth. As politicians and diplomats work towards a peaceful resolution, Coutts – the bank which manages your investments – continues to monitor developments. Their expert team focus on responsible investing and long-term returns based on economic fundamentals. This is across all our portfolios which are also well diversified to manage risk.
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We regularly update our articles depending on what’s happening in the market so check back for future updates.