Pound Sterling Inflation
By Adrian Ash
June 13, 2007
Inflation keeps eating away
at the Pound Sterling's value...
CASH SAVERS in Britain should count themselves lucky.
The Pound Sterling only lost one-third of a penny to inflation
in May 2007.
Yes, the Pound Sterling's purchasing power lost
2.5p to inflation from a year earlier. Inflation over the last
decade means that £1 spent on the High Street today would buy
you 15% less than it bought in spring 1997.
Throw in mortgage repayments, local government
taxes and buildings insurance, and the Pound Sterling has now
lost one quarter of its value to inflation over the last decade.
So says the old Retail Price Index.
But luckily for home-buyers and leveraged investors
trying to get by using the Pound Sterling today, property
expenses and indirect taxes just don't count anymore. Inflation
in the cost of consumable goods and services is the only kind of
inflation that the Bank of England worries about. And the CPI, a
data series running for the decade now, just tiptoed further
away from the record high inflation it recorded in March.
That means lucky old Mervyn King governor of
the Bank of England can keep the lid on his fountain pen for
another month. No open letters to the Chancellor are needed to
explain away inflation this June, even if the Pound Sterling
money supply is rising at 14% year on year.
"The UK's inflation rate fell to the lowest in
seven months in May after utilities cut gas and electricity
bills," as Bloomberg reports this morning. Cue the Pound
Sterling to sell off on the currency markets even though Dr.
King himself was out on a jolly in Cardiff, Wales last night,
talking tough about raising Pound Sterling interest rates.
"Our job," said Dr King of central
banking, "is rather like taking part in a 'spot the ball'
competition...'Spotting the shock' is a perpetual challenge for
us. The shocks we have identified are the reasons we raised Bank
Rate four times over the past year."
If Dr. King's looking for shocks, he's got plenty
of reasons to jump at the moment. Total output in the UK has
grown at an annualised rate of 3% for the last 18 months, as he
notes nervously, "the longest run of stable output growth
since 1997."
World GDP growth, meantime, has averaged 5% per
year since 2003 and while the flood of cheap labor into
Britain should have "shocked" inflation to the
downside, business failed to hire fast enough to depress higher
wage claims, he goes on.
"Wider and cheaper availability of credit was
a shock that boosted spending," Dr. King adds a
man who's done more than most to make credit cheaper and more
widely available "thereby increasing the stock of
money...and this will push up on inflation."
"Sharp rises in the prices of energy and
food," Mervyn King says, "have squeezed spending on
other goods and services, putting downward pressure on those
prices. That is why measures of core inflation that strip
out certain prices can be highly misleading."
Finding a reason to ignore "core
inflation" would prove lucky again for the UK's chief
central banker. Consumer-price inflation rose 2.5% in May '07
compared with the same month last year, says the Office for
National Statistics a nice and benign deceleration from
April's 2.8% rate of increase.
But so-called core inflation, excluding food,
alcohol, energy and tobacco, accelerated to 1.9% from 1.8%
"matching the highest level since 1997," as Bloomberg
reports.
You might wonder quite what's left in a
cost-of-living index after you've stripped out food, booze,
cigarettes, electricity, heating and petrol. But ignore those
bills, and you'll get chance to ignore housing and fuel costs
rising 9.1% year on year. Tobacco rose 6.3%. Getting drunk
became 3.2% more expensive, even before the inflation that
regular boozing can add to your drinks bill.
But outside the pubs, clubs and bars where
deflation might kick in when smoking is banned from the start of
July "the increase in core inflation is ongoing and
that means inflation may go back up," reckons Alan Clarke,
an economist at BNP Paribas in London. "We're still in a
hiking environment, and not only in the UK."
The mere thought of higher global interest rates
continues to spook the US bond market, meantime. The yield on
10-year Treasuries the global benchmark for the price of
money broke above 5% for the first time in nearly a year
earlier this month.
Will 5% or just above prove a worthwhile annual
income for the coming decade? Washington is now looking to
auction off $8 billion in new 10-year notes this week. The price
offered by the big institutions might point the way for global
interest rates from here.
Once you've bought a bond, remember, your yield is
locked in no matter what inflation does and that's at
best, too. At worst, the debtor goes bankrupt or simply
neglects to pay up. Sovereign governments never default, of
course Argentina, Russia, Mexico, Italy and most of the rest
of the world excluded. That's why the 10-year US Treasury sets
the benchmark for "risk free" returns.
How much risk is there in owning UK government
bonds today? Unlike the United States bond market, UK gilt
prices are so high, they point to lower interest rates from
here.
Luckily for Gordon Brown, in other words, the City
and Wall Street still love the Pound Sterling even though it
keeps abusing cash savers and destroying their wealth after tax
and inflation.
Buy gold, short money...? When this bull market in
"good luck" runs out, buying
gold bullion outright might prove a wise strategy compared
with buying fixed-income bonds.
