Inflation

[1nvest]

Borrow to burn Sunak now has the UK Gilt redemption debt standing at near £4 trillion. £2.9 trillion conventional gilts, £1 trillion Index Linked Gilts.

LT/KK were ousted due to borrowing to lower taxes (in order to attract/expand/multiply the 1% that pay 33% of the tax take) ... to instead borrow to lower National Insurance as under Sunak/Hunt, but where they're also driving the 1% away (meaning the rest will have to pay 50% more in taxes just to fill that hole).

The sooner Sunak is ejected the better, a very sad day when Labour offer the better prospect of managing the economy/treasury. But we are where we are, after all Sunak was democratically elected/selected

The Tories being branded with "can't be trusted with the economy" is a crown now firmly glued in place, that took Labour over 50 years to get unstuck.

[tjh290633]

Here are the correct figures for the increase in CPI since May 2023:

Month     CPI     Change since 05/23
2023 05   131.3                0.00%
2023 06   131.5                0.15%
2023 07   130.9               -0.30%
2023 08   131.3                0.00%
2023 09   132.0                0.53%
2023 10   132.0                0.53%
2023 11   131.7                0.30%
2023 12   132.2                0.69%
2024 01   131.5                0.15%
2024 02   132.3                0.76%
2024 03   133.0                1.29%
2024 04   133.5                1.68%

TJH

[vand]

Yes... annualised number should fall next month too, may even print with a 1.x handle.

[GoSeigen]

an annualised rate of 7.8%
[...]

This month the index has risen by 0.5 since March**, by 1.5 since Octobér and by 2.2 since May last year. That's about 1.6% over 11 months. You are doing the calculation incorrectly.

An annualised rate. You are reading incorrectly.


GS
EDIT: To be clear, an annualised rate is one calculated as if the trend in question were to continue for 12 months, i.e. it's an extrapolation, of exactly the same form as TJH's back in March ["inflation will be below 2% in May's figure"]

(**)PPS: For the benefit of TJH: yes, and if the index continues to rise by 0.7 per month (as it has since Jan) then after a year has passed then the total rise will be 8.4 and inflation will turn out to have been 7.8% give or take.

[GoSeigen]

7.8% give or take

Actually 6.2%: for some strange reason I'd used 134 as the April figure (instead of the correct 133.5) which extrapolated to 7.8%.

This is all at the risk of losing the main point which is that the BoE do not base their rate decisions on amateur extrapolations of the latest few months of inflation. In actual fact I think they would be acutely aware of the few months of steady CPI index and how it looks to the layman, but they have to look through this sort of short-term noise and try to determine what is actually happening in the rates markets, in the banking system, in the consumer supply-and-demand situation and the strength of the economy -- and their longer-term effects on inflation. That is very difficult in the wake of two impulsive shocks: the supply and demand shocks of COVID and the supply chain, sanctions and energy shock of the 2022 Russian war escalation.

The fact is that when you look through those shocks the underlying economic trend is strong. Recovery has been in progress for some six years now, with the underlying trend in rates steadily upward, to the current point where short yields and money rates are above 4% in the UK and USA, yet the economy is still motoring. With inflation still running above target and looking hottish in the short term I think rates may remain high.

It also bears repeating what I've said before: rates only tend to come down when everyone finally expects them to keep rising. Of course this is not iron-clad but I think it is important to bear in mind before jumping on the "interest rates must drop" bandwagon.


GS

[Nimrod103]

7.8% give or take

Actually 6.2%: for some strange reason I'd used 134 as the April figure (instead of the correct 133.5) which extrapolated to 7.8%.

This is all at the risk of losing the main point which is that the BoE do not base their rate decisions on amateur extrapolations of the latest few months of inflation. In actual fact I think they would be acutely aware of the few months of steady CPI index and how it looks to the layman, but they have to look through this sort of short-term noise and try to determine what is actually happening in the rates markets, in the banking system, in the consumer supply-and-demand situation and the strength of the economy -- and their longer-term effects on inflation. That is very difficult in the wake of two impulsive shocks: the supply and demand shocks of COVID and the supply chain, sanctions and energy shock of the 2022 Russian war escalation.

The fact is that when you look through those shocks the underlying economic trend is strong. Recovery has been in progress for some six years now, with the underlying trend in rates steadily upward, to the current point where short yields and money rates are above 4% in the UK and USA, yet the economy is still motoring. With inflation still running above target and looking hottish in the short term I think rates may remain high.

It also bears repeating what I've said before: rates only tend to come down when everyone finally expects them to keep rising. Of course this is not iron-clad but I think it is important to bear in mind before jumping on the "interest rates must drop" bandwagon.


GS

I would broadly agree, and if the economy was on an upward trend since 2018, the BoE were very tardy in raising rates from emergency levels, as they made no increase in 2018 nor 2019 before the chaos of Covid struck. Because they were so far behind the curve, inflation has proved so sticky coming down.
I note the April services cpi is 5.9% - for God's sake, this is 3 times where it should be, and is an indication of how sclerotic the services dominated UK economy still is, how lacking in dynamism, productivity and competition.
But I suspect the sticky inflation is also self inflicted because so many government determined benefits and state wages have effectively been topped up to protect their recipients from inflation, so the pain is born by a narrow group of those who have not been so rewarded.

[AndrewInDevon]

Fascinating insight on inflation and the impotency of interest rates to control,it….

https://www.woodfordviews.com/post/uk-inflation-who-is-in-charge

[GoSeigen]

Fascinating insight on inflation and the impotency of interest rates to control,it….

https://www.woodfordviews.com/post/uk-inflation-who-is-in-charge

Well some of us have been talking about the death of monetarism for more than a decade... nice to see the author has caught up. However his article is so myopic and blinkered that it is scary. It appears to be a comment on the entire economy based on two numbers £15bn and £3.8bn which amount to a mere 0.6% of GDP and 0.15% respectively of UK GDP. This is without even thinking about asset values and their variation (which help drive the so-called feel-good factor).

Like I say if this is his idea of macroeconomic commentary I hope he doesn't manage people's money or anything like that!

GS

[GoSeigen]

Virtually no inflation for the last 9 months. Come May we shall be below the 2% target. And what will the MPC do then?

TJH

Close, but no cigar.

Predictions are difficult, especially about the future.


EDIT: Inflation may hover above target for a few months. Is so what will the MPC do?


GS

[Lootman]

Virtually no inflation for the last 9 months. Come May we shall be below the 2% target. And what will the MPC do then?

Close, but no cigar.

It's close enough for government work.

I figured that inflation had peaked last year when there was a spike of commentary and interest here about buying index-linked gilts.

[RockRabbit]

Given that UK core inflation (ie inflation with the volatile bits stripped out) is still running at 3.5%, isn't it likely that the BofE will keep interest rates unchanged for a while yet?

[Nimrod103]

Given that UK core inflation (ie inflation with the volatile bits stripped out) is still running at 3.5%, isn't it likely that the BofE will keep interest rates unchanged for a while yet?

Interest rate rises have been slow to have an effect this time around because so many mortgage borrowers were on fixed rates which are only slowly readjusting to higher rates. This effect will keep bearing down on the economy over the next year. All IMHO of course.

[GoSeigen]

Given that UK core inflation (ie inflation with the volatile bits stripped out) is still running at 3.5%, isn't it likely that the BofE will keep interest rates unchanged for a while yet?

Interest rate rises have been slow to have an effect this time around because so many mortgage borrowers were on fixed rates which are only slowly readjusting to higher rates. This effect will keep bearing down on the economy over the next year. All IMHO of course.

Presumably Nimrod103 means buoying up the economy -- otherwise the logic is unsound? His argument is that the effect has allowed to economy to perform better than expected (at least by the pessimists/BoE bashers), and he is predicting that will continue over the next year...

It's close enough for government work.

I don't work for the government. I'm equally fussy about my own predictions FWIW.


GS

[Nimrod103]

Interest rate rises have been slow to have an effect this time around because so many mortgage borrowers were on fixed rates which are only slowly readjusting to higher rates. This effect will keep bearing down on the economy over the next year. All IMHO of course.

Presumably Nimrod103 means buoying up the economy -- otherwise the logic is unsound? His argument is that the effect has allowed to economy to perform better than expected (at least by the pessimists/BoE bashers), and he is predicting that will continue over the next year...

No, I mean that the actual interest rate which people have experienced (en masse) has been lower than the headline rate fixed by the MPC. But it is slowly catching up. The MPC has had to adopt higher rates than they would normally have chosen to control inflation because of this time lag.

More than 1.5 million homeowners are due to reach the end of fixed-rate mortgage deals throughout 2024, with many being forced to refinance at rates that are double what they are used to(Telegraph).

AIUI this effect will not finally end until 2026. Now that inflation has hit 2%, the MPC will have to lower headline rates in order to try to keep the economy moving, as this catchup occurs.

[vand]

Given that UK core inflation (ie inflation with the volatile bits stripped out) is still running at 3.5%, isn't it likely that the BofE will keep interest rates unchanged for a while yet?

Interest rate rises have been slow to have an effect this time around because so many mortgage borrowers were on fixed rates which are only slowly readjusting to higher rates. This effect will keep bearing down on the economy over the next year. All IMHO of course.

Yes, there was a huge "backlog" of ZIRP 2yr mortgages taken out in between late 2020-early 2022 that needed to be rolled over; that's pretty much done now and household are adjusting to their new higher rates, but the dampening effects are will still take time to through to the YoY over the next 6-12 months.

Those who went for 5yr fixes obviously still need to readjust to the new prevailing rates starting towards the tailend of 2025

[tjh290633]

Virtually no inflation for the last 9 months. Come May we shall be below the 2% target. And what will the MPC do then?

TJH

Close, but no cigar.

Predictions are difficult, especially about the future.


EDIT: Inflation may hover above target for a few months. Is so what will the MPC do?


GS

Looking back at last year's figures, July was actually lower than May's figure (130.9 v. 131.3), so with zero change in the CPI we may see an annual rise. This will no doubt come as a shock to journalists and politicians, whose skill at forecasting seems to be absent. I doubt that the MPC has looked that far ahead.

TJH

[the0ni0nking]

No, I mean that the actual interest rate which people have experienced (en masse) has been lower than the headline rate fixed by the MPC. But it is slowly catching up. The MPC has had to adopt higher rates than they would normally have chosen to control inflation because of this time lag.

More than 1.5 million homeowners are due to reach the end of fixed-rate mortgage deals throughout 2024, with many being forced to refinance at rates that are double what they are used to(Telegraph).

AIUI this effect will not finally end until 2026. Now that inflation has hit 2%, the MPC will have to lower headline rates in order to try to keep the economy moving, as this catchup occurs.

This would certainly apply to me - despite having 3 mortgages, I have not yet experienced any interest rate rise on those mortgages as they are fixed until later this year, late 2025 and end 2026. (a 5, a 5 and a 10 year fix).

I've just gone through the application process (via a broker) to renew the one that falls out of its fixed rate at the end of August 2024. Current LTV is around 40%. Current rate is 2.45% reverting to 8.24% at deal end. As it stands, it will move onto a new product with a new lender at a rate of 4.64%. No fees and free legals included. I could have gone for a 3.96% deal but that involved a c£2k product fee.

The big "unknown" for me is the approach we will see from the Labour government in respect of savings. I have the savings available (50k in Premium Bonds and then other savings in non-tax free accounts) to pay the one coming due off if I wanted, and probably will generate enough free cashflow to pay each of the others as they migrate off the fixed rate.

But I like having probably 3-4x my annual expenditure in savings immediately available should the need arise. But given the fact Starmer has said working people are effectively those who don't have any savings (WTF), I suspect something will be heading in my direction which may serve to otherwise force my hand.

(It also depends when any changes start happening - if they try and not rock the boat for 12/24 months, circumstances may well have changed).

[1nvest]

No, I mean that the actual interest rate which people have experienced (en masse) has been lower than the headline rate fixed by the MPC. But it is slowly catching up. The MPC has had to adopt higher rates than they would normally have chosen to control inflation because of this time lag.

More than 1.5 million homeowners are due to reach the end of fixed-rate mortgage deals throughout 2024, with many being forced to refinance at rates that are double what they are used to(Telegraph).

AIUI this effect will not finally end until 2026. Now that inflation has hit 2%, the MPC will have to lower headline rates in order to try to keep the economy moving, as this catchup occurs.

This would certainly apply to me - despite having 3 mortgages, I have not yet experienced any interest rate rise on those mortgages as they are fixed until later this year, late 2025 and end 2026. (a 5, a 5 and a 10 year fix).

I've just gone through the application process (via a broker) to renew the one that falls out of its fixed rate at the end of August 2024. Current LTV is around 40%. Current rate is 2.45% reverting to 8.24% at deal end. As it stands, it will move onto a new product with a new lender at a rate of 4.64%. No fees and free legals included. I could have gone for a 3.96% deal but that involved a c£2k product fee.

The big "unknown" for me is the approach we will see from the Labour government in respect of savings. I have the savings available (50k in Premium Bonds and then other savings in non-tax free accounts) to pay the one coming due off if I wanted, and probably will generate enough free cashflow to pay each of the others as they migrate off the fixed rate.

But I like having probably 3-4x my annual expenditure in savings immediately available should the need arise. But given the fact Starmer has said working people are effectively those who don't have any savings (WTF), I suspect something will be heading in my direction which may serve to otherwise force my hand.

(It also depends when any changes start happening - if they try and not rock the boat for 12/24 months, circumstances may well have changed).

Council tax will IMO at least double, for (extremely) energy efficient properties, quadruple or more for others. Water rates treble. Tax Avoidance will be drag into being considered the same as Tax Evasion, so declining/no allowances (ISA's/SIPP's/IHT/CGT/PA etc.) other than for relatively little amounts (few K at most perhaps).

[Mike4]

Tax Avoidance will be drag into being considered the same as Tax Evasion,

This effect being kicked off by the Tories when they accepted the lefty argument that landlords were "getting away with" offsetting mortgage interest costs against rental income and avoiding tax. Offsetting at one's marginal rate has now been stopped and is limited to basic rate. Further action in this direction was planned I reckon, and is a racing certainty that Labour will stop it completely using the need to bear down on "avoidance" as the excuse.

[the0ni0nking]

This effect being kicked off by the Tories when they accepted the lefty argument that landlords were "getting away with" offsetting mortgage interest costs against rental income and avoiding tax. Offsetting at one's marginal rate has now been stopped and is limited to basic rate. Further action in this direction was planned I reckon, and is a racing certainty that Labour will stop it completely using the need to bear down on "avoidance" as the excuse.

I was thinking about the way they could squeeze more from landlords (as a landlord myself - & owning the properties direct not through a Ltd Company).

Could they phase out interest relief completely - it wouldn't surprise me. & yet another nail in the coffin of non-Ltd company landlords if they do. From a purely selfish perspective, if that's all they do then it won't have a huge impact on me as I could pay off the mortgages in totality.

I'd be more concerned if they end up cutting out legitimate expenses such as repairs/maintenance from the allowances. In Spain, as a current non-resident, I'm not allowed to deduct anything from the gross rent so am paying tax on that number. Thankfully, repairs etc have cost me little over there so it's always remained cash-flow positive (helped by the fact there is also no mortgage).

But picking one property in the UK, it's interest costs are c£2k but repairs have been between£2.0k-£3.5k every year for the last 3 years. There is then letting agent fees of c£1.3k and service charges of £1.2k. I guess they could argue that individuals don't get to deduct repairs/maintenance from their tax bill for their own home so why should landlords - totally oblivious to the fact that being a landlord ties up significant capital which should be expected to generate a reasonable return.

Or they could also go after the Ltd Company set-up and change legislation there - I've no idea what % of homes available for rent are owned direct by people or owned by a ltd company.

Either way, I'm sure we're yet to witness the end of the vilification of (residential) landlords.