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Category: News Highlight

News Highlight: UK inflation hits double-digits

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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.

News Highlight: Latest US Inflation

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“Apprehensive” was the word that seemed to dominate the financial markets on Wednesday this week, ahead of the latest US Consumer Index (CPI) report, telling us the degree of inflation consumers faced in July. Most market commentators had already pencilled-in a slight drop in the inflation rate. That assessment was correct – the CPI fell in July to 8.5% compared to June’s annualized rate of 9.1%.

The dilemma for the US Federal Reserve has intensified – when it next meets should it continue to put interest rates higher? As we have said before, the risk of doing nothing is that inflation – which has its own particular dynamic – might stick around at this level, and make all US consumers poorer. But putting up interest rates aggressively could push the US into recession.

The US economy is still running red-hot – its unemployment fell to 3.5% in July, a half-century low, and back to what it was in February 2020. Job vacancies in the US dropped by 605,000 to 10.7 million by the end of June; still, there are almost two job vacancies for every available worker. Employers added 528,000 jobs that month, markedly higher than June’s 398,000.

News of the massive job hires had an immediate effect on US Treasuries – the yield on two year-Treasuries exceeded that of the 10-year; this inversion of the yield curve is widely regarded as heralding an economic contraction. And while jobs have been added, big employers (such as Ford and Walmart) have announced layoff plans.

The economist Nouriel Roubini sharply divides opinion but he warned of the Great Financial Crash two years before it happened. His view about where we are now is perhaps worth listening to. He wrote this week that the “Great Moderation” (characterized by low inflation, relatively stable economic growth and “sharply rising values of risky assets such as US and global equities”) is now over and will be followed by the “Great Stagflation” in which “long-term bonds and US and global equities will suffer, potentially incurring massive losses”.

The Biden Administration managed to squeeze the Inflation Reduction Act through the Senate last Sunday, which promises (if passed) to raise $739 billion and authorize $370 billion in spending on energy and climate change, reduce the deficit by $300 billion, will provide three years of subsidies in the Affordable Care Act, lower prices for prescription drugs, and introduce some fresh tax rises. The Act is oddly named; according to various sources it will have almost no impact on current inflation.

The major reason for the inflation drop seems to be a weakening of the price of gasoline, which rose to a national average of $5/gallon in mid-June and now average slightly more than $4/gallon. Gasoline accounts for just 4% of the overall CPI. The cost of food (almost 14% of the CPI ‘basket’) went up by almost 11%, the most since 1979 and shelter costs (almost 33% of the CPI ‘basket’) were 5.7% higher, the biggest rise since 1991.

We regard gold as a most reliable form of money, proven over time to be resistant to inflation. With Glint you are able to use gold as real, everyday money. 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. For us, gold is security, and Glint its key.

 

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

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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.