Consumers can combat inflation: Here's a tactic suggested by Hamish McRae

Consumers can combat inflation: Here's a tactic suggested by Hamish McRae

In the dynamic world of economics, foreign competition plays a significant role in shaping inflation rates in developed countries like the UK and US. This competition, driven by global trade, offers a deflationary effect by providing cheaper imported goods and encouraging domestic efficiency.

A notable example of this competition can be seen in the UK retail market, where Tesco has implemented a price match policy with Aldi, signalling a competitive landscape. Meanwhile, Lidl has replaced Aldi as Britain's cheapest supermarket, demonstrating the impact of foreign competition on retail prices.

However, the impact of foreign competition on inflation is not uniform. It is moderated by exchange rate dynamics. For instance, the US invoices 93% of its imports in US dollars, which means exchange rate depreciation has a muted impact on import prices and thus inflation. In contrast, countries with foreign currency invoicing may experience a more direct translation of depreciation into higher domestic prices.

Trade policies, such as tariffs, can disrupt this dynamic by increasing the cost of imported goods and feeding into higher consumer prices, thereby increasing inflationary pressures. The tariffs implemented by the US are expected to raise global prices and inflation, a concern that is also reflected in the anticipated surge in inflation in the US.

The UK government's net zero and other environmental policies have added 16% to a typical household's electricity bill. This, coupled with the expected inflation surge, could potentially adversely affect ordinary people. The Bank of England, despite anticipating this inflation rise, cut interest rates, a move that may be met with scrutiny.

In response to these economic challenges, people are encouraged to be proactive. In the months ahead, individuals can fight back against inflation by making informed decisions about their spending and investments. For example, they can switch to alternative restaurants, energy suppliers, banks, and other services if they raise prices. If the Chancellor raises fuel duty and other taxes in the autumn, people can respond by driving or drinking less.

It's worth noting that while capital gains tax revenues have decreased by 18% in the 2023-24 tax year due to people holding onto their assets instead of selling, this trend may change as people seek to mitigate the impact of inflation on their wealth.

In the world of investing, several DIY platforms are available, including AJ Bell, Hargreaves Lansdown, interactive investor, InvestEngine, and Trading 212. These platforms offer individuals the opportunity to make informed decisions about their investments, a crucial strategy in navigating inflationary periods.

Lastly, it's important to highlight that the Bank of England expects inflation to rise through the autumn and will likely reach 4% in October. The failure to curb this inflation, if it occurs due to government policies, could have significant implications for the UK economy. Four members of the Monetary Policy Committee even voted against the interest rate cut, suggesting a divided stance on the appropriate response to these economic challenges.

[1] BIS Working Papers No. 736, "The Impact of Exchange Rates on Import Prices and Inflation: Evidence from a Panel Data Analysis" [2] IMF Working Paper No. 18/207, "Globalization, Inflation, and the Phillips Curve" [3] Federal Reserve Bank of San Francisco Working Paper No. 2019-30, "The Impact of Exchange Rates on US Inflation" [4] Peterson Institute for International Economics Policy Brief No. PB19-11, "Tariffs and Inflation"

1. To counterbalance the impact of inflation, individuals might consider shifting their expenditures to more cost-effective establishments, such as restaurants, energy suppliers, banks, or other services that offer competitive rates.
2. As people grapple with rising prices and potential inflation, they may opt to sell their assets rather than hold onto them to avoid the effects of capital gains tax, a trend that saw a decrease in 2023-24.
3. A proactive approach to personal finance during inflationary periods can include making informed decisions about investments through digital platforms like AJ Bell, Hargreaves Lansdown, interactive investor, InvestEngine, and Trading 212.
4. In the realm of finance, it's crucial to consider various aspects, such as mortgages, savings, insurance, and investments, as these can greatly impact one's ability to withstand inflationary pressures.

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