Inflation is still a problem.

And the public knows it. As Reuters reports:

The British public’s expectations for inflation in the long run rose in February to their highest level in more than five years, according to a Bank of England survey on Friday that is likely to underscore its cautious approach to cutting interest rates.

Expectations for inflation in five years’ time or longer rose to 3.6% in February from 3.4% in the previous survey, conducted in November, the BoE said. It marked the highest reading since November 2019.

That’s worrying, for multiple reasons.

First, it means that prices continue to rise. That’s not good for the public.

Second, it means people are losing hope that prices are going anywhere but up.

Thirdly, it means those same people are beginning to accept higher levels of inflation.

That third point is the most worrying of all.

Remember, for the past 40 years, governments, central banks and economists have insisted inflation around 2% is the ideal rate.

That itself is a con job. Consistent and persistent inflation not only means rising prices, but it also means the value of your savings is being eaten away.

Regardless, your editor has long suspected that central banks have been keen to increase that so-called “ideal” inflation rate.

Our belief is they want to increase the “ideal” rate to 3% or higher.

To illustrate what that means for you, we use the Rule of 72. Most folks are familiar with that as a way to calculate how long it will take to double your money as a fixed interest rate.

So, an interest rate of 2% will take you 36 years to double your money (72 divided by 2). And interest rate of 5% will take you just over 14 years to double your money (72 divided by 5).

But you can use the same formula to give you a rough estimation for how long it will take a constant inflation rate to halve the value of your savings. An inflation rate of 2% means your savings halve in value over 36 years.

But an inflation rate of 3.6% (using the number from the Reuters report above) means the value of your savings will halve in 20 years.

Why would any government or central bank do such a thing?

Debt. Specifically, the extraordinary levels of government debt. That’s true here in the UK and elsewhere in the world.

Governments know they can’t possibly repay debts the honest way. They can only repay debts the dishonest way. That is, by using inflation to devalue the money it has borrowed and will need to repay when the gilts mature.

That means repaying old debts with today’s devalued money. A win for the government… a lose for the investor. Not to mention, of course, a lose for the consumer due to the higher cost of living.

The British public is feeling beaten down right now. Ongoing high inflation will do nothing to solve that. Investors have no choice but to be more active with their investing strategy.

Links to last week’s essays below.

Hope you’re having a great weekend.

Cheers,

Kris Sayce
Publisher, Southbank Investment Research

What you missed this week…

Will a recession kill AI stocks?

The fact Trump has openly recognised China’s long game says to me that he’s prepared to set long-term plans in place early. This is so he gets at least some form of recognition for them to play out over the next four years. Read more here…

Don’t get carried out (on a stretcher)

For decades, global financial markets have been driven in part by so-called carry trades, or convergence trades. Both share the common characteristic of sourcing cheap funding, wherever to be found, in order to purchase a higher yielding asset. Read more here…

A crude warning

You might have noticed that the price of petrol has declined slightly of late. What you may not have noticed is that the market price of crude oil is now about the lowest it has been for several years. As the world’s most widely traded industrial commodity, that is almost certainly telling us something important about the global economy. Read more here…

A time for choosing

Transatlantic disputes in trade and defence have escalated dramatically of late. Time is running out for Britain to find a way to leverage the “Special Relationship” with the US in a way that serves its national interest. Read more here…

Götterdämmerung? Or Sicherheitswende?

Germany’s presumed next chancellor plans to issue a huge amount of new debt to fund military expansion. That’s likely to be not only expensive but inflationary. The best way to keep costs and inflation down would be for Germany to go nuclear. Read more here…