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Glint Special Report: Uncontrollable Inflation

So, inflation in the UK is now 9.1%, a fresh high in 40 years. What will it be soon? Probably 11% in October, says the Bank of England (BoE). "It's ou...

23 June 2022

Gary Mead

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So, inflation in the UK is now 9.1%, a fresh high in 40 years. What will it be soon? Probably 11% in October, says the Bank of England (BoE). “It’s our job to make sure inflation returns to our 2% target… we will take the actions necessary… to do this we have increased our interest rate from 0.1% to 1.25% since December 2021” says the BoE on its website. Cynics suggest that the inflation ‘target’ will soon double – 4 will be the new 2.

“I want people to be reassured that we have all the tools we need and the determination to reduce inflation and bring it back down” said Rishi Sunak, Chancellor of the Exchequer, the man tasked with running the UK’s finances, after the latest inflation data was published.

Sunak is a politician; he knows how to trot out emollient words. But not only has he lost control over prices; he’s also lost control of the narrative. For the government does not have the tools; or at least it won’t be in a hurry to use them. Moreover, he is embarked on a policy of giving away £15 billion ($18.3 billion) to households to cushion the blow from high energy bills. He said he is “proud to say that around three-quarters of that total support will go to vulnerable households”. The other quarter who are not ‘vulnerable’ (which includes former Chancellors like Kenneth Clarke, who has said he doesn’t need it) will go into stoking inflation.

No-one under 40 knows what inflation this high is like. No-one under 40 knows what it takes to stifle very high inflation. Forty-three years ago (Rishi Sunak is 42) Britain elected an earlier Conservative government and Prime Minister, Margaret Thatcher. That government put interest rates up to an unimaginable 17%, and to 17.99% in 1980; it managed to stifle 1979’s inflation of 13.39%/year and, by 1983, inflation was approaching more tolerable levels, of 4.59% that year. Those high interest rates were unbelievably painful for mortgage-holders, people on welfare benefits, people on fixed incomes such as pensioners, and those who lacked the muscle to force a matching pay rise from employers. And the Pound since 1979 has lost 81% of its value.

Today, we have inflation at 9.1%, just 4.29% lower than in 1979, and yet interest rates of around 16% lower than in 1979. When Rishi Sunak says his government has the ‘determination’ to reduce inflation, one wonders who he is trying to kid. Are these the words of a serious person? Sunak seems to be a conventionally-minded economist, which means he believes that inflation can only be tamed by pushing interest rates higher than inflation – so if he is serious, he should perhaps press the BoE to raise its base rate to 10% (or slightly higher) immediately. Only Turkey’s President Recep Tayyip Erdoğan, seems to think that inflation (now 70%/year in Turkey) can be quelled by cutting interest rates.

 

That inflation is now uncontrollable is obvious. Regulated energy tariffs are forecast to jump by 40% in October, costs paid by factories for materials and energy (a key determinant of prices paid by consumers in shops) are 22.1% higher than a year earlier, the biggest increase since these records began in 1985. Food price inflation in Britain is likely to hit 15% this summer, according to the Institute of Grocery Distribution (IGD). “We’re unlikely to see the cost of living pressures easing anytime soon… we are already seeing households skipping meals – a clear indictor of food stress”, said IGD chief economist James Walton. In April, the research company Kantar predicted the annual cost of supermarket shopping would rise by £270 ($331) this year but now estimates it will rise by £380 ($466). All this, without counting the inflationary costs of the ongoing war in Ukraine and Russia’s threat to halt gas deliveries to the European Union in retaliation for sanctions. Although Britain imported just 4% of the gas it used last year from Russia, any supply cut from Russia will push up international prices.

Why do we assert that Sunak isn’t serious when it comes to inflation? The reason is simple – Recession. If the BoE were to raise interest rates even close to where inflation is headed, the shock of that would throw the economy into an almighty recession, with massive job losses and collapsing businesses. This wouldn’t happen overnight – it wasn’t until 1984 that unemployment reached an all-time high of 11.9%, when interest rates were 9.5% in the UK.

The Conservative government will already be eyeing the next general election, just two years away. Sunak has at least two targets – increasing economic growth and engineering an exit from the current crisis that will secure a victory at the polls in 2024. With rejuvenated public sector trade unions, already angry that their members have seen no wage growth in the last decade, now queueing up to demand inflation-matching salary increases, he is likely to fail at both. The irony is that he is giving away £15 billion as a voter-placating gesture, but that huge sum will be forgotten very quickly.

So, what can ordinary people do to help protect their savings while governments experiment with ballot-boosting ways to control our economies? Obviously at Glint we don’t offer financial advice, but we are strong believers in putting our savings into gold. Gold has gradually increased in value by 500% since the 1970s, while the GB Pound and the US Dollar have lost over 85% of their purchasing power.

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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