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Urgent Stock Market Message

UK Inflation Smashes Through 3%, Hits 3.5%, Bank of England Says Don't Panic!

Economics / Inflation Feb 16, 2010 - 04:35 AM GMT

By: Nadeem_Walayat

Economics

Best Financial Markets Analysis ArticleThe inflation mega-trend continues to forcefully manifest itself in the continuing surge higher of UK Inflation as measured by the Consumer Price Index (CPI) which soared from 2.9% to 3.5% for January data. Inflation has virtually doubled in a little over 2 months rising from 1.9% for November data to now stand at 3.5%, the surge in inflation has caught the whole mainstream media and academic economists by surprise that barely 2 months ago were still contemplating deflation. The RPI continued its spike higher rising to 3.7% from 2.4% the month before, and the real UK inflation rate as measured by the Market Oracle rose from 2.7% to now stand at 4.3%.


Mervyn King, the Governor of the Bank of England was forced to write a letter to Alistair Darling to explain why he is incapable of doing his job i.e. keeping CPI inflation within the 1% and 2% band. The excuses contained within his latest letter include the VAT rise to 17.5% and rise in petrol prices, both of which he sees as highly temporary. Therefore it will be interesting to see what he writes in the letters to follow during the next 6 months as inflation stays above 3%.

My analysis since November has been warning of a spike in UK inflation as part of an anticipated inflation mega-trend (18 Nov 2009 - Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend ) that culminated in the forecast of 27th December 2009 (UK CPI Inflation Forecast 2010, Imminent and Sustained Spike Above 3%) as the following updated graph shows today's inflation rate is virtually exactly inline with the forecast that continues to project towards a sustained trend of above 3% for most of the year :

During 2010 the workers of Britain will increasingly be squeezed by the twin forces of inflation and tax hikes that could spark the dreaded wage price spiral that the Bank of England so fears, hence the repeatedly soothing public words that soaring inflation is temporary whilst privately panicking that they have lost control of inflation. Workers under intense pressure could boil over during the summer into serious civil unrest on a scale not seen since the 1980's, especially after the next general election when the realisation dawns that Britain is EXACTLY where GREECE is in terms of the impact of the debt crisis and requirement for steep tax hikes and severe spending cuts.

Whilst the risk of wage price spiral is still some way off, which usually follows a prolonged period of worker discontent, i.e. a outbreak of strikes right across the country which so far to large extent has yet to materialise as a consequence of the high unemployment following the recession. Therefore the risks of a wage price spiral are more likely to occur during 2011 than 2010 as British workers are forced to endure the pain, the only outlet for which they have is the next General Election. However the government recognising this, is engaged in a policy of bankrupting Britain to minimise voter discontent.

Apart from hitting workers in terms of falling pay in real terms, inflation also eats into the real value of savings deposited at virtually ALL British banks and building societies that even now, are engaged in cutting the rates offered to savers to as little as 0.1%, as my earlier analysis illustrated (23rd Jan 2010 - UK Savers Losing Money on Virtually ALL Instant Access Savings Accounts) That virtually all accounts LOSE savers money in real terms AFTER inflation and AFTER the 20% Savings tax. That situation has now deteriorated even further as savers subsidise the bankster bonuses via loss of value of savings deposited in tax payer bailed out banks.

The Inflation Mega-Trend

The full implications of the unfolding inflation mega-trend including forecasts trends for major markets for many years are contained within the NEW Inflation Mega-trend ebook that I am making available for FREE, which includes analysis and precise forecasts for:

  • Interest Rates
  • Economy
  • Inflation
  • Gold & Silver
  • Emerging Markets
  • Stock Markets
  • Stock Market Sectors and Stocks, including ETF's
  • Natural Gas
  • Agricultural Commodities
  • House Prices
  • Currencies
  • Crude Oil

The 109 page ebook is being made available for FREE, the only requirement for which is a valid email address. To find out how to protect your wealth against the inflation mega-trend get your free copy of NEW Inflation Mega-Trend Ebook NOW (The ebook mailing is being staggered between 10th Feb and 18th Feb 2010 to manage high download demand).

UK Interest Rate Implications

The mainstream view is for little if any change in UK interest rates this year, this is illustrated by Roger Bootle of the Daily Telegraph continuing his assertions even as recently as last week that he expects UK interest rates to stay below 1% for the next 5 years.

However my in depth analysis of 13th January (UK Interest Rate Forecast 2010 and 2011 ) concluded with the following forecast:

UK Interest Rates Forecast 2010-11: UK interest Rates to Start Rising From Mid 2010 and Continue into end of 2010 to Target 1.75% / 2%, Continue Higher into Mid 2011 to Target 3%.

Subscribe Now to my always free newsletter to receive the Inflation Mega-Trend Ebook for FREE.

Source: http://www.marketoracle.co.uk/Article17274.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-10 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

SC
16 Feb 10, 17:04
SC

It's probably the worst kept secret in the country that both parties plan to increase Vat from 17.5% to 20% after the next election. Bearing that in mind I'd say it is very optimistic of King to expect inflation to be within his targeted band.

It's awfully tempting to go into the banks and building societies and just take the cash out and tell them to talk about it with the BOE. I for one am running out of patience at subsidising other peoples mortgages ,cash for clunkers , the bankers yield curve. Basically having made prudent decisions I'm heartily sick of not getting my nose in the trough especially when I 'own' part of that trough.


DH
23 Mar 10, 04:52
interest rate and infaltion forecast

Naddem, Your UK inflation and interest rate forecast is looking embarrassing now. Your forecast of UK rate hikes for last year was wrong and will be wrong again this year. The BoE will keep rates at 0.5% for the rest of 2010.


Nadeem_Walayat
23 Mar 10, 09:49
Embarrasing ?

Embarrasing ?

I don't think so....

BoE wants to keep rates at 0.5%, but I expect it won't be allowed to do so.

As for last year, I warned that UK interest rates would start to crash lower when rates were at 5%, and suggested savers fix their savings for 1 -2 years at rates of between 6.5% and 7.3% (available at the time). Advice which I followed ! :)

http://www.marketoracle.co.uk/Article6675.html

NOTHING to be embarrassed about being out on year end rates by 1% based on aforecast made a YEAR earlier.

The point is this I analyse the markets with a view to monetizing on trends by putting my own money on the line on the basis of my analysis, so it has to be accurate or I WILL lose money.

Which is why I caught the stock market bottom in March and concluded unequivably (none of this bear market rally BS) that we were in a STEALTH bull market that I expected would run for many years.

So I invested, and profited, now if that bull market had not transpired then being embarrased would far easier to deal with than the hole in my portfolio.

I expect interest rates to rise, 1.5% to 2% by end of this year, and 3% by mid 2011.

Watch and learn ;)


DH
23 Mar 10, 10:56
Embarrasing ?

As far as the stock market, congratulations but I don’t think I even mentioned that??

On rates I was referring to the fact that you thought rates would rise to 1.5% by the end of 2009. As far as this year’s forecast, there is no way the BoE will raise rates this year at all, let alone to your forecast of 2%. Watch and learn


Nadeem_Walayat
23 Mar 10, 12:20
Interest rates

The reason interest rates did not rise is because since March 2009 we have had no market, the rates are being kept artificially lower as a consquence of QE and other mechanisms.

UK inflation bottomed in mid 2009 as expected and had trended higher into the end of 2009 as forecast. Interest rates would have followed this trend had they market not been actively manipulated where the Bank of England abandoned its policy of keeping inflation at 2%.

Which is why we have inflation above 3%. If interes rates were at 1.5% then inflation would be at 2%.

I could have done what all other academic economists do that is to change their forecasts every month, but I chose NOT TO as that is basically a worthless excercise when it comes to attempting to monetize on trends.

Everyone can be right if they change their forecasts every month, but you cannot go back and make investments in hindesight.


Christine
24 Mar 10, 07:41
Savings rates

Given your interest rate predictions I am in a quandry what to do with my Cash ISAs...

Current Cash ISA offerings especially for transfering are around the 2.5% mark, you can get fixes for 3-5 years at around 4% and Northern Rock is offering a stepped account to 5.5% if you tie the money up for 5 years.

Does that seem sensible or do you think there will be very large increases in inflation over the 3-5 year period?


Nadeem_Walayat
24 Mar 10, 14:22
Cash ISA

I can only say what i would do.

I wound'nt' fix for 3 to 5 years at 4%, minimum would have to be 6%.

The Northern Rock equates to an AER of 4.5%

Only 18 months ago ISA interest rates were between 6% and 7%, so 5 years is a long time to fix at 4.5%.

IF I was transferring, I would be aiming for a 1 year fix at between 3% and 3.5%.


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