A bitter pill to swallow.

Inflation as of June 2023

“Somehow, in the UK, someone needs to accept that they are worse off”. Huw Pill 

That’s right, according to the Bank of England’s chief economist, Huw Pill, we are all poorer than we were this time last year and we must accept it. Since inflation came knocking on our doors in 2022, the Bank has raised interest rates 12 times. Yes, that’s right, 12 times, and inflation is still higher than their own inflation projections predicted.  

There is a committee meeting next month, and guess what, they are expected to raise rates again. So, what the heck is going on, and why does the Bank seem to be behind the curve? I took a deep dive into the most recent Monetary Policy Report and what I found wasn’t all bad news.  In fact, in some cases what the Bank is saying is at odds with the actual data they quote in their own report. Strange.

Let’s have a look at the reasons to be more cheerful.

1. Inflation is coming down

There are good reasons to expect this to happen during the rest of the year.

Food price inflation is slowing. Wholesale agricultural commodity prices have come down since the Spring of 2022 and BoE research suggests production costs are levelling.Energy prices are falling from recent highs. That’s not to say prices will come down to pre-2020 levels for some time, but there is some respite on the horizon. Energy prices are predicted to fall 16% and that will take 1% off the headline rate of inflation.

 Rising interest rates have yet to filter into the mortgage market. I am not saying this is a reason to be cheerful as I know many families will face rising mortgage payments when their current deal expires.

But from a policy perspective, the lag between interest rate rises and the knock on effect to mortgage and loan rates going up is gettng shorter and shorter. There will likely be a pinch to household spending and price rises should taper.  

2. We will likely avoid a recession

Earlier this year the Bank was predicting a shallow and prolonged recession during 2023 and into 2024. In this latest report they are predicting modest growth over the next 3 years with the outlook less weak than previously thought. If we do avoid a recession that will be a relief to many. Recessions normally mean rising unemployment. Unemployment can bring incredible strain on families. Let’s hope the Bank is not wrong on this one.

3. The Wage-Price spiral

The Governor Andrew Bailey took a leaf out of Huw Pill’s book, when implying that the British people should not ask for higher wages and accept, they will again be poorer. To be frank I find that rather distasteful and feel the language he used was not very helpful. After all, it’s not our fault we have inflation. It isn’t unreasonable to want to protect your standard of living by asking for pay rises.  Especially when companies have been quick to raise prices and, in some cases, have been profiteering. (Sorry, I will get off my soapbox!) 

But here is the real kicker; Mr Bailey must have misread his own report! 

There he was trying to shift some inflation blame on to workers driving up wages and costs and yet the numbers don’t back him up.

In the Bank’s report it says pay growth has eased and could continue to decline. 

So where does this leave us? 

I would say we are at the ‘half time’ stage in the game against inflation. I feel in the second half of the game, interest rate rises will slow down price rises and, yes, inflation will fall. 

We will be a little poorer, and so we need to make sure our long term investments are designed to beat inflation over time and recoup our lost purchasing power. 

I’m not sure the Bank of England has won many friends recently. They’ve certainly been behind the curve, but in fairness, they do have a tricky job to do. 

They are the experts and have a long list of qualifications between them. I just wonder if ChatGPT or some other clever Artificial Intelligence programme could do a better job than the committee?

Graham McCulley

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