Most of the media and commentators believe that inflation is due to drop, but here's why they are wrong. Inflation is here to stay for a significant period. Before we start, it's important to clear up some basic issues without spin from politicians or fake experts trying to mislead you. These are factual answers, not open to interpretation.
What is inflation?
Inflation is a reduction in spending power of a currency. The UK along with many western currencies measures inflation by comparing the cost of a basket of items at different points in the year. Then deducts about 10% from the real figure, to come up with something called “CPI” (Consumer Price Index).
What causes inflation?
Money printing - Inflation is caused by there being too much currency being in circulation. The common misconception is that this happens when the Bank of England print money and give it to the Government, but this only accounts for less than 4% of the nation’s supply of currency. The real increase in currency supply happens when someone approaches a Bank for a mortgage. The Bank digitally prints 100% of the loan amount.
For example, if someone wanted to borrow currency to pay for a £1m property. The Bank is allowed to print 90% (£900,000) out of thin air, so long as the customer brings 10% in the form of a deposit.
It is estimated 96% of the currency generated in the UK each year is born this way.
Supply Problems - The second reason for inflation is a drop of goods, services or assets. If demand for items remains the same, but supply drops, prices will rise.
Most of us will know that the UK is a basket case when it comes to producing its own goods. In the past 50 years, manufacturing has fallen off a cliff. Manufacturers/Suppliers abroad have now started to raise their prices and this is feeding through into the UK.
Ultimately, inflation is caused by a combination of these two issues.
Common Mainstream View
The overwhelming opinion in the media is that inflation will fall shortly, prices aren’t expected to fall (that's would be deflation), but they rate at which it increases each year will slow. Their reasoning is that people will run out of money and slow down their spending on non-essential items. They also think that as interest rates rise towards 4%, people will slow down their mortgage borrowings and this will stop money being printed.
But here is why they are wrong.
All of these people who predict a reduction in inflation are assuming that the UK is a free market economy. There is no free market, the UK is a series of monopolies that won’t let competition in to lower prices. The economy is manipulated by vested interests.
The business model of many mergers and many start-ups has been to lower their prices and run the company at a loss. Once all of their competitors are out of business, they raise their prices. Amazon (has never made a profit) is one large example of this, Uber is another. Oil is at $70 a barrel, yet on the petrol forecourt prices are acting as though oil was at $150 a barrel. This is because there are only a six refineries still in operation in the UK today.
Pre 1990’s there used to be something called the Monopolies and Mergers Commission. Its sole aim was to prevent commercial monopolies being formed, and it was very successful at it. Tony Blair and Gordon Brown ended all of that when they came in to power in 1997.
Now what we have is Hedge Funds that own considerable shares of every large company in the UK. Companies no longer have that hard incentive to compete. Why would they? They have built up huge debts running at a loss, putting their competitors out of business over the last 10 years, now it’s payback time.
The Pound Sterling is in major trouble, the national debt is out of control and getting worse. There is no intention to balance the books anymore. None of the political party’s care, the public don’t seem to understand what this even means, or what is coming. Every time the Government borrows currency, it adds to inflation.
That didn’t used to be a problem, but it has become a massive issue recently. Countries across the globe have started to settle trades outside of western currencies. Basically, they no longer need Pound Sterling to do business, they are now even starting to avoid it.
This is important because there are many billions of £’s across the globe that are about to flow back to the domestic UK economy. It would take too long to explain here, but a load of money is about to be dumped onto the UK market by foreign buyers. Those buyers will then take their good overseas, meaning goods leaving the UK Market. The balance between available goods and currency will be even more distorted i.e even more inflation.
There are many more reasons why true inflation will continue at around 16%, too many for this short article. But if you remember that the UK is no longer a free market, and that there are hundreds of billions of £’s about to be dumped back into the UK. You’ll understand there is zero chance of inflation dropping. If inflation doesn’t drop, neither will interest rates. They will instead continue to rise up towards that 16% number.
Don't for one moment think that the banking collapses are over. They haven't even begun for 2023.
Later this year, there are hundreds of billions of $'s worth of commercial mortgaages that are due to default in the USA (think 2007 private mortgage all over again). Banks have a lot of properties on their books that are in negative equity. UK banks are heavily exposed to this and will also suffer.
Nobody has a clue where any of this leads to, but in our opinion it leads to money printing, as it has for the last 15 years. Making inflation rise even faster.
More Price Caps Are Coming
If history teaches us anything, it is this, Government’s will push for price caps. They will make the crisis even worse by reducing the incentive for manufacturers to produce more goods. But why would they if there is no profit?
It’s a stupid move, that has been tried throughout history, but these days it’s all about virtue signalling. The public don’t understand what’s happening and will rush to blame anyone but those in charge.
What Can You Do?
Consider locking in your mortgage, sure the days of 2-3% are over, but good deals can still be found. Don’t discount the current 5% mortgages just because you missed out on the 2-3% fixed deals. Historically speaking 5% for a mortgage fixed for 5 years would be a great deal. In 6 months you may be looking back at those offers of 5% fixed and kick yourself for missing out.
If you can, buy some small amounts of gold. Don’t keep your assets in the £ sterling. Until inflation is under control, you are pouring money down the drain.
For some reason the bond markets are pricing in bonds as though interest rates are going to go lower. We'd usually say "follow the money", but in this case they are wrong.
Everything we have seen, all of the information we get from lenders is that rates will continue to rise significantly. Anyone with a mortgage should really get some advice. Rates won't go much lower, but they could possibly go significantly higher.
Please be very careful and challenege everything the socalled experts say.