Inflation is rising now - How bad could it get this time?
Discussion
The UK government likes to use CPI, when it pays out benefits.
The UK government likes to use RPI, when collecting taxation duties.
A coincidence that, because the CPI, which excludes housing costs, has consistently been the lower of those two measures.
Since the 2008 financial crash, interest rates (which are loosely connected with inflation) have been at their lowest level for hundreds of years.
Many younger people must have only known low mortgage and other borrowing interest rates.
Do you think there is a danger, that low rates will have encouraged stretched borrowing?
Wonder how many younger people know that inflation reached 25% in the 1970s?
That spike was caused by an enormous increase in world oil prices.
With inflation now rising (RPI =7.5%) and an enormous increase in world gas prices, where are we going this time?
Always Impossible to accurately forecast future economics, but looking back to see what has happened previously, can sometimes be a helpful start.
(Not showing the recent months)
Will many mortgage borrowers now, who have become used to acceptable monthly repayments, encounter problems?
Could negative housing equity return once again?
An interest rate increase from 2% to 4%, is of course a 100% increase in interest charge.
What do you think might happen during the next 5 years ?
Edited by Jon39 on Saturday 22 January 17:40
In the long run inflation is potentially good for borrowers. I remember when I got my first mortgage workmates who'd got theirs in the early 70s said 'the payments might be crippling for a year or two, then you don't notice them'. Forgetting that cost-of-living pay rises of 10% + weren't going to continue through the 80s.
What do you think might happen during the next 5 years ?
The thing is lenders are still happy to offer cheap loans for longer durations than 5 yrs so I would say nothing much. Recently had an offer of up to £30k personal loan from HSBC at 3.3% upto 8 years. So, maybe a bit more can kicking down the road. I’d say we will see 1.75% max base rate in 5yrs. I say bring on 4-5% base rate but can’t see it myself. The young’uns will be throwing themselves off bridges.
Remember- inflation is transitory
The thing is lenders are still happy to offer cheap loans for longer durations than 5 yrs so I would say nothing much. Recently had an offer of up to £30k personal loan from HSBC at 3.3% upto 8 years. So, maybe a bit more can kicking down the road. I’d say we will see 1.75% max base rate in 5yrs. I say bring on 4-5% base rate but can’t see it myself. The young’uns will be throwing themselves off bridges.
Remember- inflation is transitory
Edited by Phooey on Saturday 22 January 18:27
I used a benefits checker a few days ago… always good to just check.
Sadly I have too much savings to get anything… better putting £100k into a Gallardo Superleggera, then claiming £1,200 a month?
In any case, the government suggests I’d have an assumed weekly income from capital of £376.
Or £19,522 a year… or 20%!!!
The government aren’t a reliable reference for anything.
All I’d suggest is positioning the same as the government crony mates.
Get some cash ready for the fire sale imo, inflation will be transitory when no one has any money to buy anything (taxes, interest rates/debt, energy, food etc)
Wasn’t it just like this in dot com and sub prime? Inflation at cycle end, then crash and recession?
Sadly I have too much savings to get anything… better putting £100k into a Gallardo Superleggera, then claiming £1,200 a month?
In any case, the government suggests I’d have an assumed weekly income from capital of £376.
Or £19,522 a year… or 20%!!!
The government aren’t a reliable reference for anything.
All I’d suggest is positioning the same as the government crony mates.
Get some cash ready for the fire sale imo, inflation will be transitory when no one has any money to buy anything (taxes, interest rates/debt, energy, food etc)
Wasn’t it just like this in dot com and sub prime? Inflation at cycle end, then crash and recession?
Mr Whippy said:
Get some cash ready for the fire sale imo, inflation will be transitory when no one has any money to buy anything (taxes, interest rates/debt, energy, food etc)
Wasn’t it just like this in dot com and sub prime? Inflation at cycle end, then crash and recession?
Personally I think it’s dangerous thinking in terms of “cycles” especially when each of the examples you cite, and COVID, have quite different underlying causes (even if there were some financial stimulus parallels in the case of GFC). Wasn’t it just like this in dot com and sub prime? Inflation at cycle end, then crash and recession?
I doubt there will be a crash any time soon but do believe that we will continue to see high inflation and low interest rates for some time. Highly sceptical that inflation will cool by itself yet very aware that interest rates can only be used sparingly as a lever without politically unacceptable levels of pain being felt by normal people. Very much doubt that inflation will be close to 2% again for some time.
RUSTILLDOWN said:
There is an important point that inflation is affecting more than just the UK. For example, EU figures here: https://ec.europa.eu/eurostat/web/hicp/visualisati... with an interesting breakdown that highlights the significance of energy price rises: https://ec.europa.eu/eurostat/documents/2995521/14...
Mr Whippy said:
Get some cash ready for the fire sale imo, inflation will be transitory when no one has any money to buy anything (taxes, interest rates/debt, energy, food etc)
No question that therw are some assets out there at present that are overvalued based on their fundamentals but, much as some would like to see asset prices fall, I don’t think we’ll see a widespread fire sale. If you increased cash and didn’t see asset values reduce then you’ll see the real value of your money fall…Ultimately investors have a choice. Take an extreme position and hope to maximise gains by getting your reinvestment strategy and timing right, or adopt a more balanced long term view and accept (as always) that some assets will perform better than others.
Jon39 said:
The UK government likes to use CPI, when it pays out benefits.
The UK government likes to use RPI, when collecting taxation duties.
A coincidence that, because the CPI, which excludes housing costs, has consistently been the lower of those two measures.
Since the 2008 financial crash, interest rates (which are loosely connected with inflation) have been at their lowest level for hundreds of years.
Many younger people must have only known low mortgage and other borrowing interest rates.
Do you think there is a danger, that low rates will have encouraged stretched borrowing?
Wonder how many younger people know that inflation reached 25% in the 1970s?
That spike was caused by an enormous increase in world oil prices.
With inflation now rising (RPI =7.5%) and an enormous increase in world gas prices, where are we going this time?
Always Impossible to accurately forecast future economics, but looking back to see what has happened previously, can sometimes be a helpful start.
(Not showing the recent months)
Will many mortgage borrowers now, who have become used to acceptable monthly repayments, encounter problems?
Could negative housing equity return once again?
An interest rate increase from 2% to 4%, is of course a 100% increase in interest charge.
What do you think might happen during the next 5 years ?
Edited by Jon39 on Saturday 22 January 17:40
https://en.wikipedia.org/wiki/1973%E2%80%931974_st...
"The effect was worse in the United Kingdom, particularly on the London Stock Exchange's FT 30, which lost 73% of its value during the crash."
No idea what the future holds, but kicking the can down the road tends to store up more pain for later, IMO
Derek Chevalier said:
As you point out, the 1970s was a horror.
https://en.wikipedia.org/wiki/1973%E2%80%931974_st...
"The effect was worse in the United Kingdom, particularly on the London Stock Exchange's FT 30, which lost 73% of its value during the crash."
No idea what the future holds, but kicking the can down the road tends to store up more pain for later, IMO
Back in the 1970s I think relatively few people were affected by/involved with the stockmarket. People earned a wage and spent it or saved it in a building society. State pension not SIPP. No ISAs, very little consumer credit. So I think a horrendous crash would have far more effect now than it did then.https://en.wikipedia.org/wiki/1973%E2%80%931974_st...
"The effect was worse in the United Kingdom, particularly on the London Stock Exchange's FT 30, which lost 73% of its value during the crash."
No idea what the future holds, but kicking the can down the road tends to store up more pain for later, IMO
A product designed to mitigate, or even benefit from, inflation might sell well...
I spose I am also of the generation that has also only really known low or lowish rates. But I'm not too worried.
In 2011 my first mortgage was for 225k at 6.09pc. Plus a 200 quid a month service charge. That was doable on 2 ok ish incomes in our mid 20s.
2012 I get rid of the 6pc mortgage and get one for 3pc. Saved me 400 quid a month.
Fast forward a few years I've paid the mortgage off by moving about a bit.
2022 I'm now gearing up with a mortgage just a smidge over 300k. But this time it's 0.99pc fixed for 5 years. 1200 a month. On a house that should be worth (when I've finished with it anyway) 1.1m ish. So I've ended up with a mortgage on a much more valuable house in 2022 which is cheaper than the mortgage on my first flat (which cost me 250k in 2011). But I've also got nursery fees and all the other stuff that comes with it now so I feel poorer than I ever have done really.
It's financially probably not the most prudent thing I've ever done but I am pretty long the suburban London property market. People will always want decent period houses with a nice garden, a drive etc and I can't see them tanking in value.
All I can say in conclusion is God bless santander and their 0.99pc 5year fix. I wouldn't be buying the house I am without their kind assistance. If I'm paying 2pc at the end of my 5 year deal, after paying off 50k over the 5 years in the monthly repayments of my current 0.99pc deal, the repayments will be pretty much the same even though the rate has doubled.
If rates go to 3 or 4 pc in 5 years time then yes things will start to feel very uncomfortable.
In 2011 my first mortgage was for 225k at 6.09pc. Plus a 200 quid a month service charge. That was doable on 2 ok ish incomes in our mid 20s.
2012 I get rid of the 6pc mortgage and get one for 3pc. Saved me 400 quid a month.
Fast forward a few years I've paid the mortgage off by moving about a bit.
2022 I'm now gearing up with a mortgage just a smidge over 300k. But this time it's 0.99pc fixed for 5 years. 1200 a month. On a house that should be worth (when I've finished with it anyway) 1.1m ish. So I've ended up with a mortgage on a much more valuable house in 2022 which is cheaper than the mortgage on my first flat (which cost me 250k in 2011). But I've also got nursery fees and all the other stuff that comes with it now so I feel poorer than I ever have done really.
It's financially probably not the most prudent thing I've ever done but I am pretty long the suburban London property market. People will always want decent period houses with a nice garden, a drive etc and I can't see them tanking in value.
All I can say in conclusion is God bless santander and their 0.99pc 5year fix. I wouldn't be buying the house I am without their kind assistance. If I'm paying 2pc at the end of my 5 year deal, after paying off 50k over the 5 years in the monthly repayments of my current 0.99pc deal, the repayments will be pretty much the same even though the rate has doubled.
If rates go to 3 or 4 pc in 5 years time then yes things will start to feel very uncomfortable.
LooneyTunes said:
Mr Whippy said:
Get some cash ready for the fire sale imo, inflation will be transitory when no one has any money to buy anything (taxes, interest rates/debt, energy, food etc)
Wasn’t it just like this in dot com and sub prime? Inflation at cycle end, then crash and recession?
Personally I think it’s dangerous thinking in terms of “cycles” especially when each of the examples you cite, and COVID, have quite different underlying causes (even if there were some financial stimulus parallels in the case of GFC). Wasn’t it just like this in dot com and sub prime? Inflation at cycle end, then crash and recession?
I doubt there will be a crash any time soon but do believe that we will continue to see high inflation and low interest rates for some time. Highly sceptical that inflation will cool by itself yet very aware that interest rates can only be used sparingly as a lever without politically unacceptable levels of pain being felt by normal people. Very much doubt that inflation will be close to 2% again for some time.
RUSTILLDOWN said:
There is an important point that inflation is affecting more than just the UK. For example, EU figures here: https://ec.europa.eu/eurostat/web/hicp/visualisati... with an interesting breakdown that highlights the significance of energy price rises: https://ec.europa.eu/eurostat/documents/2995521/14...
We’re not too different to the US, and we all know that inflation isn’t 6% so it probably is the same as 1980 but with different global dynamics.
LooneyTunes said:
Mr Whippy said:
Get some cash ready for the fire sale imo, inflation will be transitory when no one has any money to buy anything (taxes, interest rates/debt, energy, food etc)
Wasn’t it just like this in dot com and sub prime? Inflation at cycle end, then crash and recession?
Personally I think it’s dangerous thinking in terms of “cycles” especially when each of the examples you cite, and COVID, have quite different underlying causes (even if there were some financial stimulus parallels in the case of GFC). Wasn’t it just like this in dot com and sub prime? Inflation at cycle end, then crash and recession?
I doubt there will be a crash any time soon but do believe that we will continue to see high inflation and low interest rates for some time. Highly sceptical that inflation will cool by itself yet very aware that interest rates can only be used sparingly as a lever without politically unacceptable levels of pain being felt by normal people. Very much doubt that inflation will be close to 2% again for some time.
RUSTILLDOWN said:
There is an important point that inflation is affecting more than just the UK. For example, EU figures here: https://ec.europa.eu/eurostat/web/hicp/visualisati... with an interesting breakdown that highlights the significance of energy price rises: https://ec.europa.eu/eurostat/documents/2995521/14...
Mr Whippy said:
Get some cash ready for the fire sale imo, inflation will be transitory when no one has any money to buy anything (taxes, interest rates/debt, energy, food etc)
No question that therw are some assets out there at present that are overvalued based on their fundamentals but, much as some would like to see asset prices fall, I don’t think we’ll see a widespread fire sale. If you increased cash and didn’t see asset values reduce then you’ll see the real value of your money fall…Ultimately investors have a choice. Take an extreme position and hope to maximise gains by getting your reinvestment strategy and timing right, or adopt a more balanced long term view and accept (as always) that some assets will perform better than others.
Millions all acting emotionally together gets you the boom/boost, or demand shocks, or whatever else.
Humans don’t do reversion to the mean in a smooth controlled fashion.
Inflation caused by salary rises due to a hot economy, fine, prices spiral up.
But inflation without salary rises will cause discretionary spending to crash.
Even for those average earners enjoying a 10% pay rise, chances are it’ll all be eaten up next year in energy costs alone.
Just what’ll power this new wave of growth with interest rates rising from near zero, and rapidly falling disposable income for the vast majority, is beyond my understanding.
Were inflation more level I’d be planning on buying stuff, going out to restaurants etc… instead I’ll be making do with my old stuff and cooking at home.
To pretend that the mass of society all acting with a similar sentiment won’t tank the real economy, is dreaming in my opinion.
Simpo Two said:
Derek Chevalier said:
As you point out, the 1970s was a horror.
https://en.wikipedia.org/wiki/1973%E2%80%931974_st...
"The effect was worse in the United Kingdom, particularly on the London Stock Exchange's FT 30, which lost 73% of its value during the crash."
No idea what the future holds, but kicking the can down the road tends to store up more pain for later, IMO
Back in the 1970s I think relatively few people were affected by/involved with the stockmarket. People earned a wage and spent it or saved it in a building society. State pension not SIPP. No ISAs, very little consumer credit. So I think a horrendous crash would have far more effect now than it did then.https://en.wikipedia.org/wiki/1973%E2%80%931974_st...
"The effect was worse in the United Kingdom, particularly on the London Stock Exchange's FT 30, which lost 73% of its value during the crash."
No idea what the future holds, but kicking the can down the road tends to store up more pain for later, IMO
A product designed to mitigate, or even benefit from, inflation might sell well...
Regarding inflation protection, I think you've got to work out what you are trying to protect against (i.e. what's the exact problem you may face if inflation gets painful) and whether the potential downsides are worth it.
Derek Chevalier said:
Regarding inflation protection, I think you've got to work out what you are trying to protect against (i.e. what's the exact problem you may face if inflation gets painful) and whether the potential downsides are worth it.
The problem faced is 'getting poorer in real terms'.The opportunity is to find some cunning investment that thrives in periods of high inflation. I just don't know what it is... but firmly believe there is always someone profiting in times of adversity.
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