Ignore Political Spin. Inflation is Not Just A UK Thing.

Given the current political turmoil in the UK, inflation is being used as a weapon by politicians.  Labour blaming the Conservatives for high cost of living and the energy price crisis.  Equally, do not believe the Conservatives or the Bank of England in that inflation is due to global influences and not just UK actions.

In search of some truths and using Office for National Statistics (ONS) figures, we have looked at inflation over the last two months for the 5 'west' economies of the G7 countries (i.e.  7th biggest economy members).  Findings are:

As you can see from the above, all countries have much higher than normal inflation compared to the last 20 years but France is clearly lower.  Most countries have suffered high than normal inflation due to increased energy and fuel costs and despite fuel costs falling, food costs and eating out costs have rocketed.

This is not about the UK government mismanaging the economy.  All countries have higher inflation and if it were Labour or the Liberal Democrats of the Scottish National Party in power, they would still be taking advice from the same people at the Treasury and Whitehall and would likely have done the same.  Equally, the Bank of England is independent, so they likely have still taken the same actions on interest rates.

Our rise in September inflation is down to food costs.  The £ is weak (this is partly the fault of the Bank of England for not increasing interest rates enough) meaning that food imports are more expensive.  France does not have the same reliance on food imports as fundamentally iit is the farmyard, fields and vinyard of Europe.

Inflation is higher than planned due to the Russia/Ukraine fuelled energy price crisis, but governments still needed inflation to devalue all the covid debt we have accumulated.  The UK alone borrowed £500bn of which 75% was fixed rate borrowing/debt and 25% was inflation linked debt.

We know we have written this before but if you have sustained inflation of 5% pa over a 10 year period, cumultively that is 62%.  5% inflation over 10 years will devalue fixed rate debt by 62% over 10 years and even more over 20 or 30 years.

Make no mistake though, in recent budgets, governments both in the UK and overseas have done little to bring down prices.  There has been no cut on VAT or sales taxes, which would have brought prices down overnight.  There has been only energy grants for all and more for low income households.  These did nothing to bring prices down, it has just put money into ciculation for you to better afford higher prices. 

Whilst the US Federal Reserve has been more aggressive to bring back inflation by increasing interest rates to a range of 3% to 3.25% pa, the Bank of England has only increased to 2.25% pa so far and the European Central Bank is only at 1.25% pa.  Central banks have done too little, too late to bring inflation under control.  They will arue that they did not want to push economies into recession but recession is coming anyway.

Governments need inflation right now by design.  Do not forget this, whoever is in power next week or nest year, be that Conservative, Labour or the Monster Raving Looney Party.

You need to plan for ongoing higher inflation and longer term higher energy costs.  We cannot move the cheap, green energy overnight.  It is going to take 20 or 30 years to do so and the ‘iron curtain’ is closed down for cheaper energy.

Factor these into your 10 year plan:

• Income and expenses – expenses are already going up, wages will eventually rise but for now we need to ‘tighten our belts’.
• Pensions – you need to save more, invest wisely and also be aware that annuity rates are improving.
• Mortgages are getting much more expensive as they did in the 1980s.  Expect a property prices correction.
• Bank accounts will offer higher savings interest rates. 

We believe that all leaders and central banks could have done more but by desire and design, they have not and will not do too much to bring down inflation for the time being.  In 5-10 years yes, but not right now.

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