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).
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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.
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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.
