So we now have the UK CPI at 4.5% and the RPI at 5.2%. I haven’t blogged about the UK Inflation situation since my post back in August of 2010. Why? Well as I wrote back then I had accepted that the Bank of England was going to steal from me and all the other savers out there by inflating away the value of my savings. Also, while ever Mervyn and his mates (I think I’ll just call them the M&M’s from here in) keep interest rates at record lows of 0.5% this is going to continue so I really have nothing more I can add. All I could do was protect myself as best as possible by ensuring I had my target allocation of 5% in gold and also that I held onto my NS&I Index Linked Savings Certificates (reinvesting as they came up for renewal) while I waited out the current theft that is occurring.
What I have however seen today though would be funny if it wasn’t so serious so it warrants a post.
Firstly, the M&M’s in their August 2009 Inflation Report (Image 1 here) predicted that by now the CPI would be at 2%. What they didn’t say then though was the minor adjustments that were needed to make that 2%. This was kindly included in Mervyn’s latest letter to the Chancellor – “the current high level of inflation reflects three main influences: the increase in the standard rate of VAT in January to 20%, higher energy prices and increases in import prices. Although the impact on inflation of these factors is difficult to quantify with precision, it is likely that had they not occurred, inflation would have been substantially lower and probably below the target.” I find it kind of funny. It’s just like the CEO of a company saying that if we didn’t have to pay the workers then we would have made a profit. You just can’t choose to exclude things to make it look the way you want.
How about I have a go. The current high level of inflation reflect twelve main influences (page 5 here): higher food & non-alcoholic beverage prices, higher alcohol & tobacco prices, higher clothing & footwear prices, higher housing & household services prices, higher furniture & household goods prices, higher health prices, higher transport prices, higher communication prices, higher recreation & culture prices, higher education prices, higher restaurants & hotels prices and higher miscellaneous good & services prices. Although the impact on inflation of these factors is difficult to quantify with precision, it is likely that had they not occurred, inflation would have been zero. This means that not only are we justified in keeping rates at 0.5% we might even consider lowering them. What success! I think I’ve just solved the UK’s problems.
Secondly, back in the real world inflation seems to be getting worse not better. My first chart is taken straight from the May 2011 Inflation Report. The August 2009 report told us we would be at 2% by now however this latest report comforts us all by telling us that we have to now wait until April 2013 (while we watch our savings haemorrhage) for the Bank of England to meet their remit. So back in 2009 their estimate was only out by nearly 4 years! My second and third charts show reality. Inflation looking like it’s about to go exponential and that on an annualised basis, RPI over the last 3 months is running at 9.4%. Even better than that in the last month alone the CPI on an annualised basis is 12%!
Thirdly back in August of 2010 I made the statement – “I can live with the Bank helping the reckless government and excessive borrowers by inflating away their debts. What I don’t like is the risk going forward. That is that we end up with yet another boom with these ultra low rates. Then the bubble is pricked and we get the bust. The Bank then has nowhere to go with rates because they are already at record lows. What do they do then?” It’s not quite a boom yet but the risks are certainly building. CITY A.M. has today reported that the global hedge fund industry has hit a record of $2.02 trillion (£1.2 trillion) as “investors have flocked to the vehicles to place assets due to above inflation returns during a time of low interest rates and uncertain markets”. So everyone is now chasing a real (after inflation) return and in doing so is ramping up their risk. The next bust really is going to be a beauty.
It’s all going to end in tears. Meanwhile I’m sticking with my Retirement Investing Today strategy.
As always do your own research.