News Highlight: UK inflation hits double-digits

Inflation in the UK in July exploded to an annualised 10.1%, the first double-digit increase in more than 40 years.

This news will further pressure the UK government, which is temporarily paralyzed, awaiting the choice of a new Prime Minister.

Strikes are threatened or happening across a wide range of industries; energy prices continue to spiral, seemingly out of control; a “punishing cost of living crisis” is underway according to one commentator; and worse inflation is on its way and will stay high throughout 2023 – 13% says the Bank of England (BoE), more than 14% according to some bank analysts.

“The genie has escaped from the bottle”, says Jason Cozens, founder and CEO of Glint. “The Bank of England said last September that its view was that ‘price pressures will be transient’ and that inflation ‘is likely to rise slightly above 4%’; this has proved to be a grotesque miscalculation. It will be a struggle to put the genie back in that bottle”, added Jason.

Food price inflation in July was almost 13%, with bread, dairy products, meat and vegetables contributing the biggest rises. Anecdotally, consumers record much higher increases. Academic research shows that inflation hits the poorest hardest as they have less access to defensive anti-inflation hedges.

Job vacancies have also fallen, for the first time since August 2020, and real (i.e. inflation-adjusted) wages have dropped at the sharpest pace since 2001, when records began.

Conventional economics suggests that to counteract inflation a central bank needs to raise base interest rates to at least equal, or better to exceed, the inflation rate. The BoE has an inflation target of an annual 2%; in August its Monetary Policy Committee (MPC) voted to increase the base rate from 1.25% to 1.75%, which. To put interest rates at or above the current inflation rate and would cripple economic growth however; the BoE is already forecasting unemployment rising to 6% from the current 3.8%. A significant worry for the BoE and the government is that a wage-price spiral might take hold, with workers pushing for and obtaining inflation-beating wage increases, and these increases feeding into further inflation.

Henry Kaufman, the former Salomon Brothers economist, has said of the struggle the US has to rein-in consumer inflation in excess of 8%, that Jay Powell, chairman of the Federal Reserve has been insufficiently bold: “If you want to change someone’s view, if you want to change someone’s action, you can’t slap them on the hand, you have to hit them in the face”, said Kaufman. Kaufman’s comment could equally be applied to the BoE, which is taking a highly relaxed view of the current inflation, way of creating conditions of a recession.

“We are starting to discover the consequences of the astonishingly lax monetary policy of the past few years. Blame for this high inflation will be laid at the door of Covid-19, Russia’s invasion of Ukraine, droughts, but the real source is the vast amount of quantitative easing in the UK, Eurozone the US and elsewhere. The British Pound is now annually losing 10% of its purchasing power”, says Cozens. “Given that it has already lost almost 80% of its value in the past four decades, this is a sorry tale of monetary mismanagement”, he adds.

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.

Gold is security. Glint its key.