The Consumer Price Index (CPI) rose by 9.9% in the 12 months to August 2022 (source: Office for National Statistics ). Though the August inflation rate was slightly lower than the July inflation rate, it is one of the highest rates of inflation that the United Kingdom has experienced in the last 40 years. Rising prices of fuel and food were the largest contributors to the price rises. Russia’s invasion of Ukraine is largely responsible for high commodity prices across the world. As of now, there is no end in sight as far as the War in Ukraine is concerned. High inflation is likely to persist in the coming months. The Bank of England expects inflation to reach 11% in October and then remain above 10% for a few months before starting to come down (source: Bank of England, 23rd September 2022); for households reeling under the effect of high cost of living, the situation might get even worse with winter approaching.
Impact of inflation on household discretionary spending
The Bank of England has been hiking interest rates to fight inflation. The central bank has already raised interest rates by 2% in 2022, including a 0.5% rate hike on 22nd September 2022 (source: Bank of England). The bank rate as of September 2022 is 2.25%, which is the highest since the global financial crisis of 2008. Rising interest rates have sent mortgage rates soaring. Homeowners remortgaging their expiring fixed rate mortgages are likely to see their monthly mortgage payments going up substantially.
Higher mortgage costs, along with the rising cost of living are keeping many customers from spending on discretionary products and services. According to The Financial Times, retail sales volumes declined in July 2022. We may see discretionary spending decline further in the coming months as households see their food and energy bills rising. At a time when households are forced to cut back on discretionary spending, you may be inclined to cut back on your Accident, Sickness and Unemployment (ASU) insurance cover. However, it is important to consider the importance of Income Protection insurance in times of high inflation, especially if you are unable to work due to accident, sickness or unemployment.
Recession threat
High inflation has a negative impact on economic growth because consumers usually reduce demand for non-essential goods and services when prices are high. High interest rates also have a negative impact on private investments. The Bank of England has warned the UK will fall into recession this year. The economy is forecast to shrink in the last quarter of this year (source: Bank of England, Monetary Policy Summary August 2022). The recession may continue until the end of 2023. With the recession threat looming and household expenses rising, one should give very serious consideration to the continued benefits of income protection insurance as a safety net if you are unable to work due to accident, sickness or unemployment.
Income Protection Gap in the UK versus other European countries
Data from a research study undertaken by the Centre of Economic Performance (13th July 2022), shows the percentage of people experiencing a large loss in income after losing their jobs is significantly higher in the UK compared to markets like Germany, France, Netherlands, Australia and the Scandinavian nations. The study also showed 40% of employed people in the UK experienced a large loss of income when becoming non-employed compared to 30% of employed people in Germany and 26% of employed people in France. The percentage of employed people experiencing a large loss of income when becoming unemployed is even lower in some Northern European countries. It is important to ensure that you have adequate income protection insurance in place in order to covert hose essential parts of your household expenditure including mortgage payments, etc if you are unable to work due to accident, sickness or unemployment.
Why is ASU insurance important in these times?
If you are unable to work due to accident, sickness or unemployment, you have to contend with both loss of income and higher costs; you can run out of your savings quite quickly in such circumstances. ASU insurance will help to replace at least part of your income during the period you are unable to work due to accident, sickness or involuntary unemployment. In difficult economic conditions, you should ensure you have adequate income protection in place and continue to prioritise it over other discretionary items if necessary. Realm Protection offers different types of short term income protection, Accident, Sickness and Unemployment and Mortgage Payment Protection Insurance (ASU and MPPI) products that may be suitable for your needs. Click on the "Products" page on our website to know more about the Realm Income Protection and Mortgage Payment Protection products.