Inflation data – 2018

Recent inflation data

The rate of inflation across the UK stood at 3 percent in January 2018, unchanged from the previous month and above market expectations of 2.9 percent. Prices of recreation and culture rose further while cost of food and transportation increased at a softer pace. Inflation Rate in the United Kingdom averaged 2.58 percent from 1989 until 2018, reaching an all time high of 8.50 percent in April of 1991 and a record low of -0.10 percent in April of 2015.

 


source: tradingeconomics.com

 

We see, from the chart below, that the gilt yields indicated by the 30 year gilt auction has continually declined to a point of 1.98%. This means that inflation is currently higher than 30 year risk free interest rates. In other words, savers (bond holders) lose money in real terms.

 


source: tradingeconomics.com

 

By combining the two charts it become clear to see that the basis between inflation and interest rates is at a local high.

 


source: tradingeconomics.com

With the above, it is expected that either inflation will decrease or interest rates will rise. Given that inflation is driven globally, it is more likely to be the case that UK rates will have to rise to match inflation that the converse.

 

Bank rates

Cash in the bank at the time of writing will yield zero percent. Sometimes up to 0.5% for various savings accounts. This means that bank cash is the worst investment (in terms of lowest yielding).

 

Rising inflation.

With inflation rising, albeit slowly and from a historically low base, one expects interest rates to follow. This means that assets such as property will be negatively affected. In the most immediate terms, the cost of borrowing to fund a property will increase. The costs would have to be passed on to tenants or absorbed by owners which would make it less desirable to own a property thus-forth pushing down prices.

 

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