The Bank of England

I recently read an article that suggested Andrew Bailey’s (Bank of England) inflation disaster is only getting started.

It’s the most honest assessment of the current environment that I have seen in the major news sources because the journalist actually seems to understand the issues. The article suggests that the Bank of England’s Governor ought to accept some culpability for the current inflation crisis because the Bank of England failed to take action earlier.

Andrew Bailey has repeatedly called for restraint in wage rises, blaming them as a major contributor to inflation when they are clearly not to blame. The vast quantities of money “printed” by the Bank of England in the pandemic (more in the first year than the previous ten years put together) is surely a greater contributor to inflation.

The Bank of England has also suggested that the pandemic and the Russian invasion of Ukriane have had a significant impact on inflation, particularly supply lines impacting the cost of goods supply and the cost of fuel in particular.  But energy prices have fallen recently, yet inflation has stayed stubbornly high.

What’s not been in the headlines often is the impact imports have on inflation and the impact that a weak Pound has on the cost of those imports (which are generally priced in US Dollars).  Around 40% of UK consumption is imported, so a if GBP is 10% weaker against the US$ that causes 4% inflation!

Equally it turns out that the unit cost of production of many goods and services, driven down over many years through productivity, globalised production and hard negotiation with suppliers (for example from major retailers), isn’t entirely elastic. Eventually farmers decide they can’t produce food economically at a lower price, factory workers in China, India and elsewhere begin to demand higher wages and better working conditions and so unit production costs begin to go up.

Perhaps the Bank of England’s blunt tool of increasing UK interest rates (which remove spending power from people’s pockets and from companies) to, in theory, reduce demand and in turn increase competition, no longer work because we are so dependent on the global economy now.

Politicians thought that inflation would be coming down by now as did the Bank of England.  The markets now seem to think that’s unlikely any time soon too as medium-term UK interest rates now look set to be higher than currently are.

The consequence of all this – inflation may continue to erode the value of your assets in real terms. Banks, whilst having increased their savings rates a little, have hardly matched the increase in UK Base Rate and don’t look likely to any time soon.  Stock markets look unlikely to provide inflation beating returns when companies have been hit themselves by higher interest rates and wage inflation increasing costs.

Perhaps it is now time to consider allocating more of your assets to sectors that provide better returns without materially increasing your risks. The RAW Mortgage Fund may be just what you are looking for – consistent returns, backed by low loan to property value security against UK residential properties. I expect returns for our institutional share class over the next 12 months of 8.25%,  which would be overtaking inflation significantly if you believe the Bank of England’s estimate that it will drop to 5% by the end of the year.  

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Tim Parkes

Managing Director