Higher inflation is "inevitable" for UK, says City

[Lord Beria3]

http://www.telegraph.co.uk/finance/pers ... berts.html

Inflation could near double digits over the next five years according to Jupiter Asset Management's chief investment officer.

John Chatfeild-Roberts told leading trade publication Money Marketing that rising inflation was "inevitable" and would be the "Achilles' heel" of the UK economy.

Other investment experts have agreed with Mr Chatfield-Roberts' forecast.

"If the central banks keep printing money to get us out of lull period, the UK could get into hyperinflation in the next three or four years," said Pete Loweman, chief investment officer of Investment Quorum.

Jonathan Davis, managing director of Jonathan Davies Wealth Management, concurred.

He said: "There will be higher costs of living for everyone."

Totally agree with this and for those who have been reading my posts for the last few years they will know this is a old record for me. Inflation is coming and it is essential you prepare if you don't want your paper wealth to be wiped out.

[RenewableCandy]

I've not got any paper wealth. But yeah, inflation in the cost of necessities, it's going to happen (is already happening), unless people start snuffing it in such large numbers that there are noticeably fewer buyers.

[Lord Beria3]

http://www.spiegel.de/international/eur ... 021-3.html

This is a really good article on inflation.

A similar scenario would also be conceivable today. The initial situation is similar, as US economists Joshua Aizenman and Nancy Marion have determined: Then, as today, the crisis was preceded by a period of borrowing and low inflation rates. "Both factors increase the temptation to reduce the debt burden through inflation," Aizenman and Marion conclude.

A model calculation shows that a 6-percent rate of inflation could push the debt ratio down by 20 percent within four years. The saver, be it a giant country like the People's Republic of China or a small investor in Germany, foots the bill.

Thomas Mayer has already calculated what this means for private retirement funds. "If I go into retirement in Germany today and hope for a supplementary private pension of €2,500 a month for 20 years, I have to have €500,000 in initial capital, at an interest rate of 2 percent a year," the economist explains.

But if the interest rate is pushed down to zero, the fund would only yield €2,100 a month. "And if another 3 percent of annual inflation eats away at my savings, after 20 years my pension will only have a purchasing power of €1,100." In other words, even moderate inflation leads to a loss of purchasing power of more than 50 percent

This is what the central banks are going to engineer, a steady inflation rate of 5/6 % over a decade and to gradually reduce the real value of debt half over the longer term.

[energy-village]

This is what the central banks are going to engineer, a steady inflation rate of 5/6 % over a decade and to gradually reduce the real value of debt half over the longer term.

I agree that's probably the plan (assuming there isn't some sort of collapse or inflation gets out of control).

2012 = £100
6% inflation
2022 = £53.19

OR

2012 = £100
10% inflation
2022 = £35.61

OR

2012 = £100
15% inflation
2022 = £22.00

Figures based on this calculator (hope I've used it correctly).
http://www.hl.co.uk/news/future-inflation-calculator

[adam2]

Not exactly suprising, inflation does normally follow the printing of extra fiat money, even if one calls this "qauntitive easing" which may sound better but is the same thing.

Apart from money printing, we also have a growing population, both in the UK and worldwide, chasing at least a finite supply of some goods and possibly a declining supply of oil and other resources.

[Little John]

This is what the central banks are going to engineer, a steady inflation rate of 5/6 % over a decade and to gradually reduce the real value of debt half over the longer term.

I agree that's probably the plan (assuming there isn't some sort of collapse or inflation gets out of control).

2012 = £100
6% inflation
2022 = £53.19

OR

2012 = £100
10% inflation
2022 = £35.61

OR

2012 = £100
15% inflation
2022 = £22.00

Figures based on this calculator (hope I've used it correctly).
http://www.hl.co.uk/news/future-inflation-calculator

The thing about inflation, though, is that its effects are differentially experienced depending on further factors.

If we consider the following example;

In year 1, we start off with 100 quid

Over ten years, inflation of the money supply runs at 10%

So, all other things being equal, by year 10, the original 100 quid will now have the buying power of only 38 quid as measured against the buying power of that 100 quid in year 1.

I mentioned "all other things being equal", above, because if earnings rise in line with inflation of the money supply over that ten-year period, for buyers there will have been effectively no inflation rate at all. Similarly, if interest rates on savings go up by 10% for each year of that ten years, savers will have experienced no reduction in the value of their savings either.

So, the effects of inflation are felt only when there is an inflation of the money supply in the absence of an increase in intererst rates and/or an absence of an increase in earnings.

Which is, of course, pecisely what we are seeing.

And, on top of all of the above, we are also seeing the progressive tightening of supply for all of the things that money is exchanged for (due to resource constraints). This deflating of supply of goods and services produces its own upwards pressure on prices in addition to the upward pressure created by inflating the currency. So, what we have is a decreasing supply of goods and services, an increasing supply of money, low/non existent interest rates and static/contracting wages. The worst of all worlds, basically.

[extractorfan]

I think we will continue to see wage inflation at the top end but it will be hellish for the jobless / low paid.

[Little John]

I think we will continue to see wage inflation at the top end but it will be hellish for the jobless / low paid.

Yep

The top end will preserve its wealth either because its wealth is held in hard and essential assets (which are inherently resistant to demand destruction) which will rise in price in line with monetary inflation. Or,by demanding and getting salary rises in line with inflation.

Meanwhile, everyone else gets poorer.

[vtsnowedin]

One survival strategy in our present circumstances is to borrow money at the current absurdly low rates and buy the housing, transport, and income earning assets you will need in the future so you have these hard assets in hand and paid for when the interest rates balloon for everyone else. Even if you don't get everything paid off you will be paying back the loans with inflated /devalued money making the net cost of your home actually less then you pay for it now. It will be much better to own outright in the future compared to renting or leasing.

[extractorfan]

One survival strategy in our present circumstances is to borrow money at the current absurdly low rates and buy the housing, transport, and income earning assets you will need in the future so you have these hard assets in hand and paid for when the interest rates balloon for everyone else. Even if you don't get everything paid off you will be paying back the loans with inflated /devalued money making the net cost of your home actually less then you pay for it now. It will be much better to own outright in the future compared to renting or leasing.

Yes, as long as you keep your (hopefully well paid) job.

[Little John]

One survival strategy in our present circumstances is to borrow money at the current absurdly low rates and buy the housing, transport, and income earning assets you will need in the future so you have these hard assets in hand and paid for when the interest rates balloon for everyone else. Even if you don't get everything paid off you will be paying back the loans with inflated /devalued money making the net cost of your home actually less then you pay for it now. It will be much better to own outright in the future compared to renting or leasing.

Good strategy if you are a high earner in a secure profession. Very bad strategy if you are a low earner in an insecure profession. The bulk of the people are now beginning to fall in to the second of those two categories.

[emordnilap]

Nothing is predictable really but I think we'll see price chaos as much as anything.

In fact, it's already happening. We have inflation well above declared rates in several areas such as private health care and deflation in other areas, such as direct labour. And I don't think food and clothing have ever been this cheap, in real terms.

There again, published rates of inflation are always bogus.

[Little John]

Nothing is predictable really but I think we'll see price chaos as much as anything.

In fact, it's already happening. We have inflation well above declared rates in several areas such as private health care and deflation in other areas, such as direct labour. And I don't think food and clothing have ever been this cheap, in real terms.

There again, published rates of inflation are always bogus.

I think it's probably a fair assumption to make that we will see continued rises in the price of essentials as people cannot refuse to purchase these. Meanwhile there will be price falls in non essentials as people can refuse to purchase. This demand destruction may not occur for the very high-end non essentials, though, as the rich will still have the discretionary purchasing power.

Regarding clothing items, I agree they have never been cheaper. However, in recent years, production quality and thickness/durability of materials have declined markedly and so one could make the argument that they are not actually as cheap as they seem.

[adam2]

Not certain that clothing has "never been cheaper" IMHO it was at its cheapest a few years ago.
I am very glad that I stocked up when I, footwear and linens also.

[Tarrel]

@VTS;

It would be interesting to know what typical lending rates are in the US. Over here, despite Bank of England base rates of 0.5%, it still costs a lot to borrow money. Personal loan from the bank (e.g. For a car) - typically 7-8%, credit cards - typically 15-18%, mortgage on your house - depends on Loan-to-value ratio, but not less than around 4%.