Tuesday 20 April 2010

Come on Mervyn King, when will the UK Inflation rate fall?

News out this morning is that the CPI inflation rate for the Uk has hit 3.4% and RPI is at 4.4%. In normal times we would have interest rates at 5%+ to control this inflation.

But these are not normal times, the economy likes wrecked after the worst recession of our lifetimes. The Bank of England has predicted that we can expect rising inflation and then a sharp fall. Above is its latest published inflation report, published in February 2010.

The devil is in the detail , if you look at the Q1 2010 line above you can see that inflation is expected to have peaked at between 3% and 4%, but their central analysis is for a peak of under where the inflation rate is now.

So on the one hand it may be thought that the Bank is happy and we are still on course on their methodlogies, but alot rides on the April figures. For a start, Oil prices have been very high and pushing up core inflation. Wage inflation we won't know about for a couple of months. The third big piece of the puzzle at the moment is the Pound Sterling; which is sickly and the prospect of a hung parliament is making is worse.
Thus the pressures on inflation are mainly upward at the moment. not downward.

The Bank fo England is clearly expecting some large deflationary pressures to come to bear - perhaps they expected a Conservative victory in the General Election?

The result is that we are on a knife edge in terms of monetary policy - one more month of higher prices and then interest rates will have to start ticking up. Once this process starts there will be rises every month of every other month - deadly in short-order to the over-borrowed companies and people of the UK.


Nick Drew said...

the distribution around that central case is quite, quite remarkable

unsettled times ...

Bill Quango MP said...

On wages, Labour has a commitment to increase minimum wage "At least in line with inflation."

So wages will be neutral at best.

Steven_L said...

I don't expect it to fall any time soon. So I've bought some leveraged aluminium to hedge my sterling as I reckon it's going to spill over into all the other commodities again.

I reckon they won't start hiking rates until they are sure the banks can take the hit. Even then, I'm not sure there is anyone has the guts to do what Volcker did in the 80's.

It'll only be when the US has a funding crisis or currency crisis that this will happen and we're still a couple of years off I reckon.

I also think there's still a lot of money around looking for a home. I'm buying high yielding shares on about 80% leverage too (Catlin and Balfour Beatty both look like a breakout and good value).

I think we're at the stage where soon people decide they can't afford to keep their money in the bank and start hunting down yield.

mark said...

Would rising rates have any effect on UK inflation in any event?

I'm not so sure as the commodity price inflation element is caused by robust (for now) Asian growth and loose Fed monetary policy.

Also, is a tiny rise in UK rates likely to attract money back to the UK and have a measurable effect on the exchange rate? Not likely. In fact if the increasing rates finished off the economy the Govt deficit could worsen leading to all out monetisation and a weakening pound.

Also if China re-values the Yuan upwards this will make Chinese goods more expensive in the UK and give the Chinese more money to bid up the price of commodities further.

CityUnslicker said...

Mark I agree re hwo can we influence inflation to some extent; much of it is generated abroad.

What we are seeing though is the decimation of all savers. Inflation 300% higher than savings income. No wonder business investment is collapsing.

Also agree re rate rises, which is why I wrote they would be a steady stream not a one or two then leave it.

IF rate rises start, we will get to 3% or 4% in a year or two, which is actually rises nearly every month.

CityUnslicker said...

SL - Balforu on my watch list. Close to selling many share pre eletcion though. the way things currently are shorting sterling is the place to be for May.

Sell in May and go away will be back in favour I reckon this year due to the election. Safety first strategy after the bull run.

Steven_L said...

I've sold all my funds except the Ruffer ones that seem to weather any storm. I'll keep saving monthly in these for my redundancy/relocation fund.

I've got a bit of long exposure (BB and Catlin) some commodities (aluminium) and have some cash sitting on the sidelines I can't decide what to do with.

I'm still watching GBP:EUR for a breakout - it's getting close, I can feel it.

Timbo614 said...

Even as a lowly serf I have concluded bank/BS interest rates are laughable.

I have started what I call "Dividend period trading" on solid shares "blue chips" if you like, to try and earn at least something with the cash.

It's a simple strategy, wait for a dip (2-4 weeks before a reasonable dividend - buy. Then sell if prices rises enough towards ex-dividend date or take dividend and wait a couple of weeks for parity-ish on price.

Even a 50% hit rate with the other 50% at parity or a small loss (from trading costs)seems MUCH better than the max 3.5% a year on offer.

Is this a reasonable strategy for a small saver? Market collapse risk is low as can always hold and hope :) profit is looking like 10-15% P.A. so far ...?

CityUnslicker said...

Nothing wrong with dividen clipping Timbo. BUt when markets correct you may be left nursing some losses for a few months. Fine if you don't need the money.

My own form of trading is the more high risk kind, 300% or bust.

Timbo614 said...

I don't have a problem holding and waiting if a disaster occurs, what worries me a bit is all the Armageddon forecasts! I can't wait forever any longer - I'm 57 and will need the profits reasonably soon:( Just did the PRU and was out before today's drop. Next up Tesco and Morrison. Snag with MRW is the election date :(