Inflation Up Pressures Interest Rates

Inflation Up Pressures Interest Rates.

The Office for National Statistics (ONS) has released figures confirming that UK CPI rate of inflation (Consumer Prices Inflation) rose from 1.2% in November to 1.6% in December.  It is expected to continue to rise in 2017.

Sitting alongside, the old measure for inflation, the Retail Prices Index (RPI) rose from 2.2% to 2.5%.

The weakened pound, air fares, food price imports and oil prices have all contributed to the rise.

Whilst civil servants will claim that inflation of 1.6% is below Government target trend growth of 2.5%, the old measure for RPI is already at 2.5%.  What does this mean for Bank of England and base rates.

The £ instantly strengthened causing a minor fall in FTSE 100 as speculation that the Bank of England may be forced to increase interest rates.

The reality is that whilst the Governor of the Bank of England, Mark Carney, has not ruled out interest rate increases, we believe this is a smoke and mirrors exercise.  The Government wants inflation but why?

• Higher inflation equals a devaluation of public sector debt without ever repaying it
• Higher inflation equals prices rises which in turn means pay rises
• Higher wages means property values go up
• Property values going up improves our mood and sense of security (for those that own property that is)
• Property value going up means larger tax takes for the Treasury via Stamp Duty Land Tax and indeed, more inheritance tax on larger estates
• Property values going up means the Government make more money on their up to 20% deposit share in the Help to Buy programme.

Does this mirror Margaret Thatcher’s 1980’s?  We think it does.  A sustained period of higher inflation over 10 years meant property prices nearly trebling and public sector debt being totally devalued.

We do not see interest rate rises just yet, but they will go up eventually.  The issues with Brexit and Donald Trump still weigh heavily on markets and Bank of England interest rate assumptions.