Editor's letter

Why the Bank of England must act now on inflation

The Bank of England must act fast on interest rates if it wants to convince us that it is even remotely serious about stopping inflation getting out of hand.

Interest rates are going to rise before Christmas – or at least they certainly should. This week’s inflation numbers are just too high for the Bank of England to think it can continue to sit on its hands. In October, the consumer price index in the UK rose by 4.2% on the year, the fastest 12-month rise in a decade, and well over double the Bank’s target of 2%. There are apologists aplenty for the number; many note that if you take out food and energy prices the number falls to not much more than 3%, for example – and it is true that a good 50% of the rise is due to sharply rising energy prices (up 22.3%). 

But here’s the problem: as everything uses energy, the price of energy eventually feeds into the price of everything else – so excluding it doesn’t make sense. Analysing inflation at the moment is tough – the long-term disinflationary effects of technological advancement aren’t going away, and it is still hard to tell what is a Covid-19 dislocation and what is not. But it’s also hard to deny the medium-term inflationary effects of the energy transition and the tight labour market. And at these levels it is impossible to pretend that it is not a problem. 

Rich people have complained for years about rising costs (have you seen the price of a nice yacht these days?). But this round of inflation isn’t about them. It’s about the less well off; energy price rises hit them hard, with both social and political implications. Tax “bracket creep” does too. The UK has frozen both the income tax personal allowance and the 40% threshold until 2026-2027. So, for many people, even an inflation-linked pay rise may not feel like one (much of it will go on higher tax as they slide into higher brackets). 

The upshot is that the Bank – however much it wishes it could redefine “transient” to mean “five years” – must act fast to convince us that it is even remotely serious about stopping inflation getting out of hand. It avoided a rate rise at its last rate-setting meeting, arguing that with furlough ending, it couldn’t be sure the jobs market was strong enough. It can’t use that excuse next time: payroll numbers went up 160,000 last month (even as furlough wound down) and there are now 235,000 more employees in the UK than pre-Covid-19. There are no excuses left.

You may be a bit tense by now – rising inflation and rates won’t feel good. Good news then that next week brings the (digital) MoneyWeek Wealth Summit. We have a fabulous array of panellists, all with views. Some would have you invest in the UK; the FTSE 100 is around 45% undervalued relative to the rest of the world. You might say that’s just because the rest of the world is stupidly overpriced, but given the choice between grossly overpriced and not grossly overpriced which should you choose? Quite.

If you also want views on which UK shares to hold for the next decade (one might be M&S) sign up now. Some would have you invest in the strategic metals that will facilitate the renewables boom; some say go Japan; some China; some pure US tech; and some (well, one) reckons that if you aren’t invested in a Bored Yacht Club Ape NFT, then you are already too far behind the digital curve for comfort. 

A final reason to sign up? I’m interviewing Nick Train, manager of the Finsbury Growth & Income Trust, which I hold and I think a lot of you do too. The Summit is on 25 November. Get your tickets at moneyweekwealthsummit.co.uk. We hope to see you there.

Recommended

Treasury grills bank bosses over savings rates
Savings

Treasury grills bank bosses over savings rates

The Treasury Select Committee says customers are earning between 0.5% and 0.65% on basic savings accounts, well below the Bank of England base rate
7 Feb 2023
NS&I raises rates on its Green Savings Bonds
Savings

NS&I raises rates on its Green Savings Bonds

NS&I has boosted the rate on it Green Savings Bonds as it plays catch up to the savings market
7 Feb 2023
The best offers for switching banks – get up to £200 free cash
Personal finance

The best offers for switching banks – get up to £200 free cash

Looking to move bank accounts? You can now bag as much as £200 for switching current accounts.
7 Feb 2023
Digital pound likely to launch this decade
Currencies

Digital pound likely to launch this decade

The Treasury and the Bank of England have launched a consultation on the introduction of a state-backed digital pound. We explain how a “Britcoin” cou…
7 Feb 2023

Most Popular

NS&I brings back one-year fixed bonds with highest rates since 2010
Personal finance

NS&I brings back one-year fixed bonds with highest rates since 2010

NS&I’s one-year fixed bonds are back on sale after being pulled off the market in 2019 - but is the rate any good?
1 Feb 2023
The best one-year fixed savings accounts - February 2023
Savings

The best one-year fixed savings accounts - February 2023

Earn almost 5% on one-year fixed savings accounts.
6 Feb 2023
Will energy prices go down in 2023?
Personal finance

Will energy prices go down in 2023?

Wholesale gas prices are on a downward trajectory, but does this mean lower energy bills later this year?
6 Feb 2023