Tuesday, 15 February 2011

Fixed Income - Floating Expenses - Inflation still creeping up in the UK

Inflation in the UK is still on an upward trend and Mervyn King is getting more and more nervous now than before, conceding inflation will be high for the next two to three years. His hand must start to be tired given he has to write yet another letter to the Chancellor. Inflation for January is now at 4% in the UK.

I don't want to sound like a broken record but there are more than enough posts on my blog dealing with the UK inflation problems where I argued QE in the UK would be inflationary down the line:


Mr King testified today: "Inflation is likely to continue to pick up to somewhere between 4 per cent and 5 per cent over the next few months, appreciably higher than when I last wrote to you."

Dear Mervyn, as I remember last time didn't you forecast inflation pressure falling from January 2012 onwards in your last letter to the Chancellor?

"King in his last open letter to the Chancellor of the Exchequer indicated that inflation will "probably" (most likely if you ask me...) stay above the bank's target of 2% till the end of next year."

Given the already high leverage of households in the UK, it comes to no surprise that the Bank of England is trying to buy as much time as possible to avoid hiking rate. The consequences would clearly be a double-dip.

Deflating debt via inflation is the name of the game dear Mervyn.

As I previously wrote:

"The great bank robbery runs unabated...Inflation is purely and simply theft on a large scale."

Truth is, Mervyn King has no choice.

Just the facts:The UK had one of the worst household debt to GDP ratios and debt to disposable income ratios in Europe.

and in the entire G7:

For an additional visual approach on the UK debt problem please have a look at the below link:


46% of personal debt in the UK is on Credit Cards.

Average UK household debt: 57,706 GBP per household.

Total Earnings VS Total Debt: Debt = 126% of average earnings.

Total personal debt in the UK - 1,454 Billion GBP: Individuals owe more in personal debt than the country's annual output.

Now with VAT to 20% in January and the high rate of inflation, household budgets are being stretched even further. Reduced income due to benefit cuts and continued redundancies only add to the current problem.

Two thirds of UK Household Debt is tied directly to the Bank of England’s short term interest rates, therefore Mervyn King has no choice but to try to delay as long as possible a rise in interests rates as indicated in the below WSJ article by Alen Mattich:


"CreditSights, an independent research house, outlined the stark facts the Bank of England is confronting in a note this week.

Between 2000 and 2008, U.K. households’ total debt burden rose by 133%, with borrowing rising to 161% of gross household disposable income from 99%.

The Bank of England’s emergency rate cuts reduced the amount of interest payments U.K. households make to just £2.2 billion, from £19.4 billion in 2007. CreditSights estimates that just a 50 basis point hike in the Bank’s base rate would increase borrowers’ interest costs by £7.5 billion."

Not only would a rate hike be very difficult for UK Households but would also have a serious impact on public finances to the estimated tune of 15 Billions GBP for a 100 bps increase in Gilt Yields over the next five years.

So there you have it, the quiet inflation robbery game will continue. Mervyn King won't have the time to let the ink dry given the additional letters he is going to have to write to the Chancellor in the near future.

Welcome to Stagflation redux à la 70s...

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