16th November 2023  - Gary Mead  - in Economics, Inflation

Peak Interest Rates

Peak Interest Rates

There is good news and bad. First the good - inflation is slowing, although very slowly. In the UK the annualised core inflation rate in October was 5.7% against 6.1% the previous month. The UK's Consumer Prices Index or CPI - the most closely watched inflation measure - was an annualized 4.7% in October, down from 6.3% in September. In the US the CPI was an annualized 3.2% in October, down 0.5% from the previous month, while core inflation was 4% in October, down just 0.1% from September. The bad news is that slowing price rises obviously don't translate into price falls. Even though inflation is easing, price rises resulting from inflation are still baked in. On both sides of the Atlantic consumer prices on average are today around 20% higher today than at the end of 2020. Unless your salary has gone up by 20% in the past three years, you are a fifth worse off.

Another bit of good news (if you are American) is that the US economy appears to be in much better shape than the British, or that of the European Union (EU). While the British economy is struggling with stagflation - negligible economic growth combined with inflation - and Germany's will shrink by some 0.4% this year, the US economy has grown by almost 3% so far in 2023 and its unemployment rate is historically low, at less than 4%. And as yet the higher interest rates - in the US the largest cumulative increase in official interest rates in four decades - don't seem to be creating a recession. But it's too soon to breathe easy on that front; by some calculations the tighter monetary policy imposed by the US Federal Reserve, the US central bank, will have reduced real gross domestic product (GDP) growth marginally by the end of 2024.

US CPI so far in 2023

Splash the cash and worry later

Economists are scratching their heads, trying to figure out why the US economy appears to be doing so much better than the British or that of the EU. The reason is not complex: a couple of years ago the US threw money at its economy with careless abandon. In 2020 and 2021 President Donald Trump delivered more than $800 billion (£640 billion) into American pockets to 'stimulate' the economy as it stumbled in the wake of Covid-19; that was about 3% of current GDP and initially was largely unspent. Households have eaten into these funds but by August this year there was still a large amount unspent, around $500 billion (£400 billion), or almost 2% of GDP. That was followed by President Biden's almost $2 trillion (£1.6 trillion) fiscal stimulus package, passed in March 2021. That alone ensured that US GDP in 2021 would be more than 10% up on 2020. At the time that lavish and unfunded spending by the US government was seen by some as a great response to possible economic stagnation. It's not difficult to keep an economy going if the government splashes the cash with such abandon. The fiscal expansionism and the remaining household savings are taking time to work through the economy - in 2024 they will no longer be around to prop things up. We may swing from fears over inflation being out of control to nerves about a possible recession, once the US consumer has finally spent those billions.

Warning: rocks ahead

How long is the world prepared to fund America's fattening fiscal deficit, the amount of money each year that the government doesn't have but insists on spending? In the 2023 fiscal year the deficit has been $1.7 trillion (£1.36 trillion), more than 20% higher than the previous year. The US national debt will very soon be $34 trillion (£27 trillion); servicing this debt takes around 14% of total federal spending. To get this expensive debt servicing down to a more reasonable level - 'more reasonable' might be zero - the Federal Reserve will be as keen as anyone to see interest rates come down from their current 5.5%. Given that inflation is declining, the scope for easing monetary policy - for no further interest rate hikes or even cuts - looks greater than for some time.

But uncertainties linger. Is the US prepared to continue giving Ukraine the massive funds it wants for its war with Russia? Is the central bank 'target' for inflation of 2%/year still feasible? To what extent are 'populist' politicians, from Argentina to the US, about to be elected and are they going to toss aside conventional policies? Is the conflict in the Middle East going to spread and could that interrupt supplies of crude oil? How will all the policies to mitigate climate warming be funded? Any one of these factors could throw the inflation-is-slowing narrative off-course. A combination of them would pose a serious threat to stable government as we have known it for the last few decades.

In this context, of serious geopolitical and economic uncertainties, gold stands out, either as money or an asset to invest in. According to the November issue of the monthly gold compass by the asset management company Incrementum the gold price this year has risen by an average of almost 10% across nine major currencies, up to the end of October. As inflation destroys the purchasing power of fiat money, gold ensures that one's purchasing power can be maintained.

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.