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Category: Glint Special Report

Glint Special Report: The UK’s soaring inflation

“There may be a recession made in Russia but there is a recovery built in Britain.” With that rhetorical flourish Jeremy Hunt, the UK finance mini...

17 November 2022

Gary Mead

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“There may be a recession made in Russia but there is a recovery built in Britain.” With that rhetorical flourish Jeremy Hunt, the UK finance minister, wound up his Autumn Statement – a mini-Budget – delivered to Parliament yesterday.

In the UK wages are rising at their fastest rate in more than 20 years.

But wage rises are failing to keep pace with inflation. Adjusted for inflation that 5.7% pay increase (in the year to September) lags the cost of living pressure; real (i.e. adjusted for inflation) wages actually fell by 2.7%.

Now that inflation in the UK is officially 11.1% annually, wages are falling behind rising costs even faster. Frances O’Grady, general secretary of the UK’s Trades Union Congress, which has 48 member trade unions and claims to represent more than 5.5 million workers, has accused the government of overseeing the “longest squeeze on real wages since Napoleonic times”. She claimed in October this year that British workers are on course to suffer two decades of “lost living standards”.

October’s inflation figure was more than expected. Food and energy price rises were mainly responsible; according to the Office of National Statistics (ONS) food prices went up by 16.5% on an annualised basis. Clutching at straws, so-called core inflation – excluding food and energy, which are regarded as volatile – was 6.5% in October, unchanged from September.

How high might the UK’s inflation go? In August the US bank Citi forecast it would hit 18% in early 2023, substantially higher than the 13% forecast by the Bank of England (BoE), also in August. Goldman Sachs was even gloomier; its August estimate was that it could hit 22.4% in 2023.

Consumer price inflation was last above 18% in the UK in 1976. It’s perhaps predictable therefore that talk of a fresh ‘winter of discontent’ is gaining ground. The last such winter happened in 1978-79, when around 4.6 million British workers went on strike in a bitterly cold winter in support of demands for wage increases to match or exceed inflation, which in 1978 was running at 8.3% annualized.

There is one notable difference this time round. In 1978 the country was governed by a Labour government, which aimed to restrict pay increases, in both the private and public sectors, to 5%. The current Conservative government has stayed eerily quiet about trying to restrict wage increases, merely making discouraging noises about wage demands off-stage.

The Bank of England (BoE) is tasked with maintaining inflation at about 2% a year. It says its “mission is to promote the good of the people of the United Kingdom by maintaining monetary and financial stability” – on that basis its must be judged a failure now that inflation is more than five times its ‘target’. The BoE in August this year said that inflation would be “transitory” and that it expected it to rise to nearly 4% in the last quarter of this year.

It’s not just higher prices facing consumers – the money they use to pay those higher prices is crumbling before their eyes. Inflation has often been called the ‘invisible thief’ because it reduces the purchasing power of fiat money without people noticing. The difference this subtle thievery makes can be seen in all kinds of ways. The Pound Sterling has had an inflation rate averaging 5.75%/year since 1970, a cumulative price increase of 1,728.22%. What could be purchased for £1 in 1970 would require £18.28 today, simple because of inflation.

One way of combatting inflation is to use gold as money. One source suggests that when measured in Pounds Sterling, UK Houses are over 100 times more expensive than they were in the early 1950s. But measured in gold, house prices are about the same today as in 1952.

The ‘Autumn Statement’ by Chancellor Jeremy Hunt, signalled a major reverse of the proposals of his predecessor, Kwasi Kwarteng. This statement is one of the two statements the UK Treasury makes each year to Parliament upon publication of economic forecasts. Instead of a set of lavish reductions in taxation, the UK is now embarked on a subtle change to the way in which the government borrows money; no longer will the government pursue a target of avoiding borrowing for current spending, but instead will operate an all-purpose borrowing target. This means that targets can be hit by cutting investment spending and reducing capital budgets, which are politically easier to take an axe to than day-to-day spending on public services. His language was all about growth and investment, but the message was all about slowing public spending and higher taxes. The so-called ‘windfall’ taxes on oil and gas companies will go up from 25% to 35% from next year and a 45% levy on electricity generators will be introduced. The top rate of income tax is lowered from £150,000 to £124,140 a year. “We want Scandinavian quality with Singaporean efficiency” said Hunt, in relation to the National Health Service (NHS) but it could stand for his speech generally. He promised to turn the UK “into the world’s next Silicon Valley”.

Before he spoke, Hunt acknowledged that the Office for Budget Responsibility (OBR), a non-departmental public body funded by the UK Treasury, which provides independent economic forecasts and independent analysis of the public finances, said the UK is in a recession. In 2023 the OBR forecast that the economy will contract by 1.4%; unemployment will rise to almost 5% in 2024 said the OBR.

Hunt’s statement was less controversial than his predecessor’s, which threw financial markets into turmoil. He said that the government announced “fifty-five billion [pounds] of tax rises and spending cuts” – he even mentioned the need for “sound money” at one point. But with inflation further to run, and a recession already upon the country, that reference to ‘sound money’ seems flimsy. Next year will inescapably be harsh for the majority of British people.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

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