The coronavirus pandemic has rocked the globe over the past year, and financial markets have experienced much volatility. As the UK attempts to recover financially, we find ourselves asking: will this lead to a large rise in inflation? How could this affect the price of gold?
Rising prices drove up inflation at the start of 2021 as we saw the toughest lockdown measures since the start of the pandemic. The inflation rate was pushed up at the start of the year by the rising price of frozen foods, as well as furniture and household goods, where there was a noticeable lack of the usual discounting.
Factories in the UK and EU have reported much disruption and rising costs so far this year, due to both the Covid-19 pandemic and the Brexit transition. Staff illness and self-isolating have seen shortages and lower production, leading to a rise in prices. The new rules due to Brexit have also caused problems, as deliveries have taken longer to pass through borders, hampering supply lines.
All of this has seen a shortage of raw materials for many companies, leading to the UK experiencing prices rising to a four-year high, which will most probably be passed along the supply chain and passed on to the customer.
Will inflation rise?
Some analysts have suggested that the inflation rate may rise in the next few months, partly due to the fact that the annual growth of prices would no longer be compared to levels seen before the pandemic. A rise of 9% in households’ energy price cap may also lift inflation by the summer of 2021.
Brexit may also push up prices for consumers in the future. The issues with the supply chain, as stated above, don’t look to be easing any time soon, and the rise in the cost of shipping and commodities will add to inflation fears.
As further progress is being made with the Covid vaccination programme, and lockdown measures begin to ease, the UK economy will start to reopen its doors and we will see whether inflation will rise further as the economy takes its time to recover. The pandemic may have resulted in a rise in household saving, as lockdowns and social restrictions have prevented spending, which may signal a rise in consumer spending once restrictions are lifted – no doubt we will see some of this come back into the economy.
All of this points to a possible surge in inflation at some point. Many expect the pace of inflation to accelerate this year not only due to the gradual economic recovery and Brexit supply chains, but also due to rising oil prices as well as the expiration of temporary VAT cuts for hospitality expected in April, which will also add to the mix.
A powerful influence
Inflation has an extremely powerful influence over gold. When inflation increases, and uncertainty grows – investors flock to the yellow metal.
Rising inflation lowers the value of fiat currency, so savvy investors then hold their money in the form of gold. Gold becomes a useful tool to hedge against inflationary conditions and pushes gold prices higher.
As always, we can’t 100% foretell what will happen, but we know that for many people around the world, nothing says security like the possession of physical precious metals.
This blog represents one person’s opinion only. Customers should conduct their own research and take advice before making an investment. We do not offer investment advice.