Inflation Up to 0.7% pa and Forecast for 2% pa

Figures released today by the Office for National Statistics (ONS) show that UK inflation rose to 0.7% pa in the 12 months to March, up from February’s figure of 0.4% pa.

The increase was due to the rise in cost of fuel, transport and clothes.

Economists forecasts were slightly higher than the figure, as lower food prices offset other price rises. March saw the largest annual increase in fuel prices since January 2020.

Energy and oil prices are set to rise and will increase inflation again.

The Bank of England has forecast that by the end of 2021 inflation could reach 1.9% pa, whilst other experts see it exceeding 2% pa.

The ONS said: “The inflation figure would have been higher in March without a fall in food prices."

April’s inflation rate is expected to be around 1.7% pa with a large semi-annual increase in electricity and gas prices this month. 

The ONS suggest additional data will be collected after the reopening of shops and hospitality businesses, which in turn will see a rise in inflation for clothing and food services.

Comment

We have suggested many times that index linked gilt and global index linked bond fund investments, both inflation protected, are set to rise in value as demand for inflation protection grows.

There is no way that governments around the world can afford to repay their national covid-19 debts and the only way for central banks and governments to manage these debts is to let inflation increase over a sustained period to devalue debts without repaying them.  E.g. 5% pa compounded inflation over a 10 years period equals 62% overall inflation.  That would mean fixed rate government debt is devalued by 62% over a 10 year period.

We have already seen the US Federal Reserve suggest: "For the foreseeable future we will no longer control inflation with interest rates" and the UK Treasury, via Chancellor Rishi Sunak, suggested in December 2020 that the UK will revisit how the retail prices index (RPI) is calculated on or around 2030.  This means they expect RPI to rise and with significant amounts of government debt having been financed by RPI index linked gilt borrowing, the government's plan is clearly let it go up and then, once fixed rate debt is devalued, change how RPI is calculated to cut back on index linked gilt debt interest.

It is interesting to note that RPI for the year to March 2021 is now 1.5% pa, up from 1.4% pa last month.  Expect more of the same in 2021.