Any thoughts on inflation?

edited 9 October at 6:24AM in Pensions, Annuities & Retirement Planning
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  • cfw1994cfw1994 Forumite
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    I think the BoE are hoping it is transitory, personally as like many people I think it is here to stay and has further to go. The problem is our economy has been built around rising house prices, many people have massive mortgages when compared to historical averages and a 1 or 2% rise in interest rates will have a major impact for those not on fixed rate deals. 
    Inflation is viewed as being persistant. Going to take 18-24 months for the effects of the pandemic to unwind globally.  
    18-24 months?

    I admire your optimism!!

    I said shortly into the pandemic that it was the equivalent of WWII for our children’s generation.   As with that, I believe the fiscal impact may take decades to sort out….not that I personally believe we will have an extended depression, as some seem to fear: things move to fast, IMHO.

    That said, it has shown us how the world can move rapidly to find a vaccine within a much shorter timeframe than was ever possible before…as I often say, if we think technology has come a long way since (for example) the first smartphone appeared in just 2007, keep watching!
    Plan for tomorrow, enjoy today!
  • ThrugelmirThrugelmir Forumite
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    cfw1994 said:
    I think the BoE are hoping it is transitory, personally as like many people I think it is here to stay and has further to go. The problem is our economy has been built around rising house prices, many people have massive mortgages when compared to historical averages and a 1 or 2% rise in interest rates will have a major impact for those not on fixed rate deals. 
    Inflation is viewed as being persistant. Going to take 18-24 months for the effects of the pandemic to unwind globally.  
    18-24 months?

    I admire your optimism!!


    Still be the bill to pay though. 
    Real insurance claim quote : -

    "Going to work at 7am this morning I drove out of my drive straight into a bus. The bus was 5 minutes early.".
  • MK62MK62 Forumite
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    Mordko said:
    michaels said:
    You'd have thought so - but it sounds like political suicide and possibly economic as so much of the economy is also driven by house price increase.

    Plus the more inflation then can get through the system without a corresponding rise in the rate on gilts the sooner national debt becomes manageable as a share of GDP....leaves the BoE conflicted much
    I always thought that the setting of interest rates was political, but yet interest rates are set by the independent Bank of England.


    Independence can be undermined by politicians.  Politicians appoint governor for the Bank of England.  Politicians can change inflation targets or put pressure.  

    In the US Trump routinely bullied the Feds to lower interest rates.   And then politicians changed inflation targets and said interest rates should promote equality, fight climate change and god knows what else the bankers know nothing about. 
    ......nor do the politicians it seems.......and imho the "new" governor of the BoE still has something to prove if his tenure as boss of the FCA is anything to go by.....
  • MordkoMordko Forumite
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    Turkey provides a good example of how things could go badly wrong.  Turkish Central Bank used to be independent but over the last few years Erdogan fired lots of Central Bankers to take over control.  In his conspiratorial mind he believes that high interest rates and “the Joos” cause inflation.  So he forces interest rates down.  As a result of this wonderful policy Turkish Lira has been losing value against all the other currencies and inflation is running hot (approaching 20%). 

    Could this happen in the west?  I don’t think so.  Trump had all the hallmarks of someone who is both willing and sufficiently dumb to behave in this manner.  In the end checks and balances in the US proved stronger than the strongman.  He is history. 

    Western politicians and central banks can and sometimes do behave badly.  But the bankers know you can’t beat Mr Market.  Inflation will jump and stay high and the “its transitionary’” excuse will wear thin.  Shortages of goods are also a sign of inflation (and price controls).  And the market will win and force interest rates to go up.  And inflation will subside.  
  • thriftytraceythriftytracey Forumite
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    Could someone more knowledgeable than me explain why markets go down if interest rates increase (which looks likely).  Do they then settle and rise again afterwards or do they stay at lower growth?
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  • michaelsmichaels Forumite
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    Could someone more knowledgeable than me explain why markets go down if interest rates increase (which looks likely).  Do they then settle and rise again afterwards or do they stay at lower growth?
    A few reasons:
    Financial - if you are investing and you have the choice between 0% on 'safe' govt bonds and 2% yield on risky shares you might put most of your money in shares.  If the return on safe bonds goes up to 1% you might decide to pull half your money out of shares and into bonds so demand for shares reduces, less demand = lower price
    Profits - Many companies are not just funded from shareholders but also have borrowings, if they have to pay more interest on these borrowings then profits (and dividends) will be lower so the shares will be lower and we are back to bonds therefore looking relatively more attractive.
    I think....
  • prowlaprowla Forumite
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    Why have we been fortunate to live through low inflation?
  • WorkerdroneWorkerdrone Forumite
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    prowla said:
    Why have we been fortunate to live through low inflation?
    Just my simple take on it, but inflation running rampant in the mid 70's didn't seem like much fun. I suppose if you have more debt than you do savings, inflation is a good thing, but for this particular forum where most are concerned with savings and investment, and you have the cap of the LTA to worry about I would imagine a low inflation environment is more favourable.
  • handfulhandful Forumite
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    I started a thread about inflation back in June (below) when it was not seen as a risk or certainly not much of one. the signs were clearly there for me at the time when in my field (logistics) we were seeing the driver shortages really start to take effect. I said then that in 40+ years in the industry, logistics has always been a very good barometer for the economy. The driver shortages have obviously now come to be more widely seen by the government/media etc but from my own personal perspective, our company is now fully recruited and I can  see things starting to settle despite them being a long way from being resolved. Cabotage, the latest weapon is not being widely welcomed by colleagues because it could potentially push haulage rates down again after recent hard fought increases needed to fund higher pay for drivers but going back to the topic, this could help to keep a lid on inflation.

    As far as my own investments are concerned,   I haven't done a great deal about it since raising it to be honest!

  • neetneet Forumite
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    How to set a portfolio when inflation pressures abound? - was the question. Here are some options and paradoxes if no single solution.
    Central banks can drive down inflation by raising real interest rates (interest minus inflation). What they seek is broadly measured medium term underlying inflation around its 2% target (yes - they really want all those adjectives in there). Today's cpi figure at 3.1% is forecast to rise to 4-5% early next year. So why no action so far? Partly no one knows how much will be one offs (brexit, covid, gas and chip shortages and social care Council Tax effect included in their preferred CPIH, not CPI), as restaurants were in the summer, whilst many of the rises - energy and council tax are deflationary, taking away consumption and doing the work banks would otherwise use interest rate rises to do. SO If you believe a) inflation is more broadly systemic AND b) the central banks won't act e.g. from fear of recession (or a conspiracy to erode debt*) then buy gold and index linked gilts despite their high cost. But if you think a) but b) the banks will act, then real interest rates should rise and gold and index linkers fall - dramatically if the action took real rates from say -1 to +1%. These instruments are currently lethally sharp  (if you don't understand why, google bond duration; and gold erb harvey).

    As an aside the fashion for cynicism about public servants such as sit on the MPC is "anti-vaxxer daft". They are largely bookish academics with freedom to show no loyalty to government and their self interest aligned to doing the right thing. Their jihad - as for all of us - is against ego (often huge), dogma (surely worst in pseudo sciences like economics?) and groupthink. 

    An alternative is to look to equities. Specifically two categories a) portfolio of now very expensive quality global equities (low gearing, high ROCE, strong cash conversion) with pricing power (Chanel No5 real prices won't be falling) and b) those that may benefit from some of the inflation or rate rises e.g. the oil stocks and cheap banks. There is a wall of worries overhanging stock markets currently (when is there ever not?) all of which could trigger an avalanche but one thing is worth establishing. Amid the madness of QE (Quantitative Easing; where central banks print money to buy bonds forcing the price up and the yield down) the equity risk premium has risen - or a better way of looking at it, it seems the risk free rate has been preserved at c.1.5% - bonds have decoupled from the normally bipolar equity markets; in a reversal of all history it is the bond markets which are insane. (In plain english the return expected from equities is still implicit in the price.) Equities may yet fall 30% but it won't be because they forgot money should have a price/time value.

    *For a much better conspiracy consider what happens when a central bank simply forgives the government say half the QE debt it owes it and just fails to cancel the money. The currency would slide. But if all banks do it where can they slide? - except against Gold/Crypto. The central bank balance sheets would be shot of course - the optics will be dreadful - but they will be anyway if real interest rates cause their bond holdings to collapse in value.




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