Throughout the pandemic and lockdown prices have remained relatively stable and calm, but interest rates and inflation are back in the news and prices are beginning to rise – and that is rarely good news for consumers.
Inflation appears to be back, and if so, how long is it back for and what’s the likely impact on you, your mortgage, investments, oysters, chips, or prosecco? I love chips.
The Bank of England (BOE) stated their expectation of a 1.8% inflation target for this month. That was blown away by a surge to 2.1% overshooting all expectations, and some.
This is relevant as the expectations on inflation were built into potential interest rate rises which were expected to be gradual. The BOE governor stated clearly last month he wouldn’t hang around in terms of tightening monetary policy (increasing your rates) if prices stayed stubbornly above their inflationary target of 2%.
Interest rates and inflation – day to day
The general view is that the reopening of the economy and our feeling of being let out of a ‘jail’, meant we would go enjoy ourselves with a bit of retail and beer therapy. Who could blame us?
The views were that those of us who had built up savings, would indeed enjoy them and that would quickly calm down and revert to normal. The consensus may be changing and naturally, the BOE could move to slow down spending by nudging up interest rates.
Many mortgagees today are used to rates that are well below historical averages, but this policy has been in place since late 2008 and potentially may be diluting. My first mortgage hit 15.5%, 155x higher than the current 0.1% BOE base rate. Indeed, a typical five-year rate today is c1.23%. Mortgagees in the late 80s would have been paying 12.6x that figure per month.
Pause and think about that for a second, if you believe that times are currently difficult. There are many unexpected reasons for interest rates to rise or fall, and the global financial consequences can be traumatic indeed.
Undoubtedly, bottle necks are causing problems. Poor supply of any goods means with more purchasers, prices will rocket. Similarly, with less access to restaurant seats and bar seats, prices have been driven northwards. Many waiting staff who have presented me with a bill recently, did it with a reluctant sigh.
Shipping has been a massive issue with container ships charging over three times the normal cost of delivery coming in from the East. The reason? They want to make more money.
At a quick check of recent share prices the following shipping lines are up: Matson 113.6%; Maersk 164.38%.
You’ll have to explain that to me and how they are being allowed to load that on to you, the consumer. Ten hot tubs in a container that has an extra £5,000 on the container price, added to a five-month delay, is only going to do one thing to prices. That needs to change quickly. It’s very wrong.
Interest rates and inflation – the shopping basket
The view of some policy makers is that this price change is situational and temporary. We still must bear the brunt of inflationary pressures on food etc. when value added tax returns in September. The feeling will be edgy over the coming months.
If you have a mortgage, it’s well worth protecting against them being wrong with benign inflationary expectations. There is little downside movement on rates now so look to see how long you might protect at the very best rate by using an Independent mortgage broker.
As for your investments, we did mention in a recent column and a column 18 months ago that value stocks would be a good hedge against inflation and the funds I pointed out haven’t disappointed.
The much unloved funds of Artemis UK select, Man GLG undervalued assets and polar cap UK value have rewarded investors with 50.1%,26.3% and 32.9% over the last year.
Whilst May’s increase in inflation was largely down to clothing and footwear, motor fuel and recreational goods, the issues with hospitality haven’t quite made their way into those prices.
Some restaurateurs believe it’s been a tough time and they need to make their money back, a policy which will only lead to disaster once normal supply of tables resumes. People have great memories.
For more content like this visit our 50connect Finance channel.Last modified: June 18, 2021