How Crypto Can Help Combat Inflation in the UK
This article discusses inflation in the UK, how traditional investment options fail as hedges against inflation, and how crypto is a viable solution.
How Bad is Inflation in the UK?
What's Happening?
Inflation has been on a sharp rise in the UK since the beginning of 2021, with prices of goods and services continuously rising month after month. Data from the Office of National Statistics (ONS) shows that the Consumer Price Inflation (CPI) in the UK has stayed above 8% since April 2022, peaking at 11.1% in October of the same year. Despite multiple efforts from the government and the Bank of England to keep inflation below 2%, it shows little signs of waning.
Source: ONS
It is unfortunate that inflation seems to affect essential goods and services the most. According to the ONS, the areas hit hardest by inflation include fuels, transportation, insurance, milk, cheese, eggs, household goods, vegetables, fish, meat, and accommodations. Notably, gas prices have increased by 129.4% over the last year, while many food items have double-digit inflation rates.
Source: ONS
According to a new shopping prices comparison tool released by the ONS, the cost of basic items such as sliced wholemeal bread and eggs has increased significantly in the past 12 months since June last year, with prices up by 18% and 29% respectively.
Source: ONS
Thus, the Breakfast Index, which measures the average cost of ingredients of an English breakfast as shown in the chart above, went up significantly from GBP 27.92 in June 2021, to GBP 31.46 in June 2022, to GBP 37.06 in June 2023.
As one can imagine, the spike in inflation has devastating effects on the lives of people in the UK, especially when wages are nowhere near keeping up with the inflation rate. In fact, after adjusting for inflation, regular pay decreased by 0.8% in the three months leading up to May 2023, in comparison to the corresponding period in the previous year. Consequently, many people are left struggling to make ends meet.
What's the Cause of Inflation in the UK?
As life slowly got back to normal after the COVID pandemic, oil and gas were in greater demand, which put pressure on prices. Also, the war in Ukraine causes a further shortage as less oil and gas are available from Russia. This hikes up the prices further, leading to accelerating erosion of purchasing power.
Oil and gas play a crucial role in modern society, as they are used in almost all aspects of production and daily life. A surge in the prices of these commodities, inevitably, has a ripple effect on the economy and people's lives. The higher prices of oil and gas lead to increased costs for transportation, manufacturing, and other industries that rely on these resources. Ultimately, they lead to an inflationary pressure on the prices of goods and services, making it harder for people to afford basic necessities.
Moreover, the amount of grain available was also reduced due to the war, which led to an overall surge in global food prices. This effect was compounded by a shortage of salad and other vegetables due to Brexit, which took food inflation to a 45-year high.
Traditional Finance Falls Short in Tackling Inflation
The Bank of England recently raised its interest rate to 5%, the highest it had been in 15 years, in an effort to combat inflation. However, keeping one's money in the bank may not be the best strategy to offset price increase, as the current CPI stands above 8%. This means that those who keep their money in the bank are very likely to lose money in real terms due to the surge in cost of living.
The FTSE 100 and FTSE 250 are two key indices that represent the UK economy. However, while they may seem like safe bets for investors, they may not be the best choice when it comes to protecting your assets against inflation. According to data from London Stock Exchange, FTSE 100 and FTSE 250 have annual returns of -7.59% and -10.72%, respectively.
One alternative is to invest in commodities such as gold and silver, which historically have held their value during periods of monetary devaluation. Indeed, even during these times, gold price goes up by 15% in a year and silver price by 20%. Though they may help ease the effect of decreased purchasing power to a certain degree, when CPI increases over 8% month after month, the real effectiveness is up for debate.
Another option of investment in traditional finance is real estate. While many consider it a relatively good hedge against inflation, the sad truth is that real estate prices in the UK have an annual price change of 3.5% and a monthly price change as low as 0.5% (data from HM Land Registry, June 2023). Together with soaring 6% mortgage rates due to heightened interest rates, real estate may not be such a good investment after all. Some are struggling to find a few extra hundred GBP per month to pay for the rising mortgage, BBC reports.
Crypto is an Effective Hedge Against Inflation
Cryptocurrency provides an alternative to traditional finance because it operates independently of government and central bank control. This decentralization means that cryptocurrencies are not subject to the same inflationary pressures as traditional currencies. Cryptocurrencies are often seen as a hedge against inflation because their supply, especially that of Bitcoin, is limited, and they cannot be manipulated by central banks in the same way that traditional currencies can.
Bitcoin, the first and most well-known cryptocurrency, is structured technologically to be deflationary. The supply of Bitcoin is limited to 21 million coins, which means that there will never be more than 21 million BTC in existence. This limited supply means that Bitcoin cannot be subject to the same inflationary pressures as traditional currencies and it can be considered a relatively stable store of value that partially harkens back to the “gold standard”. Additionally, the value of Bitcoin has historically increased by over 300% a year, well outpacing inflation in many countries, including the UK.
Besides, there are a wide range of decentralized finance tools that can help average people invest and get high annual returns without requiring a lot of initial capital. Some outstanding examples of DeFi investment products that can efficiently tackle inflation include:
- Copy Trading enables users to follow the trading strategies of experienced traders with track records and get special insights from the elite. This product is ideal for people who are new to crypto trading and don't have much time to track every move of the market. Learn more about Copy Trading here.
- Bitget Savings is a secure way to grow their crypto assets. Users can get high APR on their savings such as 30% APR on USDT. Learn more about Savings here.
- Dual Investment is a tool for automatic investment for digital asset pairs that offers APR as high as 114.78%. Learn more about Dual Investment here.
Source: Bitget
- Smart Trend is a product that lets users make predictions and enjoy amplified rewards when the price moves in their favor. Even if the bet is incorrect, a basic APR is still offered at settlement. The product offers up to 129.98% APR. Learn more about Smart Trend here.
Source: Bitget
- Range Sniper is an investment tool that provides an opportunity for investors to speculate on changes in the price of an underlying asset. The platform offers a guaranteed basic APR and allows settlement in two cryptocurrencies. The APR of Range Sniper can get as impressive as 449.81%. Learn more about Range Sniper here.
Source: Bitget
The world of crypto offers a plethora of investment tools to help average investors combat inflation. With APRs on multiple crypto investment options reaching three-digit numbers, investing in cryptocurrency has the potential to offset the erosion of purchasing power caused by the 9.1% annual CPI. This not only allows for further savings but also provides the means to pay off a mortgage, purchase higher quality goods, and improve overall living standards. In simpler terms, if you invest GBP 100 and get a 114.78% APR, you may be able to enjoy two more posh London Fry Ups and one extra shakshuka at Claridge’s in a year.
The investment suggestions mentioned above are just the tip of the iceberg. It's crucial to conduct thorough research and find the products that align with your needs and risk appetite. With the right approach, investing in crypto can be a lucrative venture. So take the leap and start exploring your options today.
As inflation continues to be a concern in the UK, cryptocurrency presents a viable solution to combating its effects. By investing in cryptocurrencies, individuals can protect their wealth against inflation while also taking advantage of potential investment opportunities.
Disclaimer: The opinions expressed in this article are for informational purposes only. This article does not constitute an endorsement of any of the products and services discussed or investment, financial, or trading advice. Qualified professionals should be consulted prior to making financial decisions.
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