News Highlight: Interest rates rise (feebly) amid escalating inflation

Inflation is now a global problem. As the chart below shows, inflation across most parts of the world has now more than doubled what many thought it would be just a few months ago.

In the UK, the consumer price index (CPI) hit a fresh 40-year high in June of 9.4% on an annualised basis, up from 9.1% the previous month. In the Eurozone, inflation is now almost 9% annually, and in the US it’s slightly more.

Inflation is going to get worse before it gets better. The Bank of England forecast in May this year that it would reach 10%. That forecast is now looking seriously wrong. According to the Resolution Foundation, a respected and independent British think-tank, “inflation could plausibly hit 15%”.

Inflation is bad! From President Ronald Reagan – “inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man” – to Vladimir Lenin – “the way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation” – all political ideologies are united by one thing: inflation is a monetary demon.

The conventional definition of inflation is that it’s ‘too much money chasing too few goods’. The conventional method of trying to combat inflation – which ruthlessly erodes the purchasing power of fiat currencies, slashes savings, pushes people closer to the brink of financial collapse – is for governments and central banks to put up the cost of borrowing by raising base interest rates. Interest rates in the UK, US and Eurozone have been pallid for years; consumers, investors, bankers – all of us – have become accustomed to cheap borrowing costs and easy money. Those three regions have started, slowly, to raise interest rates; but they are still in negative territory, i.e. far below inflation.

Today, Thursday 4 August, the Bank of England launched another missile in its fight against rampant inflation. It put up its base rate from 1.25%/year to 1.75%. Financial media went wild – the “biggest increase in UK interest rates in 27 years” was one headline.

But today’s missile is a damp squib. As Jason Cozens, Glint’s CEO says: “This rate increase will do nothing to bring inflation under control. The major cause of this inflation is the wild money-creation spree that the world’s central banks embarked on under the Covid-19 pandemic. That laid the basis. The Ukraine war, and the threat that Russia might deprive Europe of sufficient fossil fuels, has of course pushed up energy costs to astonishing levels, and this will keep inflation going at a high level as manufacturers struggle – energy rationing is already happening in Germany. In the UK, producer prices are now their highest in 45 years. We should all be worrying about the prospects of a serious economic slowdown – for which governments and central banks seem to be unprepared”.

According to some reports, the Bank of England “risks falling behind the curve” but others take a more relaxed view. Paul Donovan, chief economist of UBS, thinks governments “really can’t change the oil price, central bankers can’t suddenly change the price of wheat and other commodities… in the short term, there is a limit to what governments can do to offset price increases”.

Inflation is now its highest since 1982. Over those same 40 years, the Pound Sterling has lost 75% of its purchasing power, the US Dollar 67%. Over the exact same period the gold price has of course moved up and down but overall it has gained 427.18% in US Dollar terms and 642.34% in Pound Sterling. It’s easy to safely buy gold with Glint, to get started just pop over to your favourite App store and download the Glint App.

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.