UK Inflation over 18% / BOE Interest Rate at 7%

[Tara]

These are fairly shocking new forecasts from Citi of UK inflation at over 18%, and BOE interest rates at 7%.

If these forecasts are even close to correct then the UK stock market probably still has a long way to fall, and UK house prices may completely collapse.

https://www.reuters.com/world/uk/uk-inf ... 022-08-22/

[Alaric]

If these forecasts are even close to correct then the UK stock market probably still has a long way to fall, and UK house prices may completely collapse.

In the 1970s, house prices just stagnated during the period of highest inflation, But generally speaking wages kept pace making housing more affordable despite sky high interest rates. In the early 1990s house ptices did indeed collapse, from the peaks of the late 1980s at least. It was when retail price inflation was under control after Ken Clarke as Chancellor and then the first Blair government with BoE independence to set interest raes, that house price inflation took off.

Prices on the UK stock market collapsed at the end of 1974 and then immediately bounced back. One theory was that the collapse was down to the accounting rules taxing profits on stocks in hand that had risen in value due to inflation and the recovery down to a certain amount of ndexation being introduced.

[Urbandreamer]

These are fairly shocking new forecasts from Citi of UK inflation at over 18%, and BOE interest rates at 7%.

If these forecasts are even close to correct then the UK stock market probably still has a long way to fall, and UK house prices may completely collapse.

https://www.reuters.com/world/uk/uk-inf ... 022-08-22/

Possibly, possibly not. Basically it depends upon if the companies listed on the UK stock market are able to pass on the increase in their costs. I'm fairly confident that at least some of them will be able to, as the alternative might be horrific. Just imagine our oil, gas and electricity companies closing up shop in the UK. We have few "growth" companies where current price depends upon guesses of future earnings, discounted to today.

House prices? Well surely that's at least partly (possibly greatly) a supply and demand thing. People need somewhere to live, are there less people or more houses? What about rental property. Well I did recently hear that rent inflation was in excess of 50% and that available property had dried up.

Make no mistake, I'm not claiming that we are not in for seriously tough times. I'm just pointing out that I question your prediction of how things will play out.

Now here is a question for savers. If Inflation runs at 18% and interest rates 7-10% (ie -8% return) where do you "save" any surplus income that you may have? Dare I point out that the popularity of the stock market or houses, may have little to do with their earning potential, and much to do with the debasement of "money". Arguably houses and the stock market have been "monetized". This may be why so many properties (far more than the need for accommodation) have been built recently in China, and before that in Spain or other places.

The "invest in a house" is currently failing in China, as it did in Spain, as wishful thinking meets reality. However the reasons for what happened (will happen again) are worth considering.

[CliffEdge]

These are fairly shocking new forecasts from Citi of UK inflation at over 18%, and BOE interest rates at 7%.

If these forecasts are even close to correct then the UK stock market probably still has a long way to fall, and UK house prices may completely collapse.

https://www.reuters.com/world/uk/uk-inf ... 022-08-22/

What were they forecasting this time last year? Bunch of useless [people].

Moderator Message:
Unnecessary name-calling removed.

[1nvest]

Prices on the UK stock market collapsed at the end of 1974 and then immediately bounced back.

If you were drawing a income/retired, the 150% nominal, 100% real gain of 1975 still left you down -60% after just three years 1973/4/5. If you had the balls to stick with stocks ...

viewtopic.php?p=524509#p524509

was little different to a coin-flip bet-all. Many in retirement had capitulated before then to 'save what little remained'.

And back then they had a functioning government with real plans/ideas in mind, not just removal of the 5% green tax levy on fuel bills, or cutting taxes that only covers those on £200K/year incomes seeing higher energy bills being negated.

[1nvest]

Per therm prices have already increased from 60p to £5 levels - during summer months. Come winter and higher demand so supply/demand is inclined to see that rise substantially more.

With government inaction the knock on effects are more inclined to become ingrained. A winter of discontent, strikes for inflation pacing wage increases that in turn induce higher inflation. The Tories look firmly set to break Labours record of can't manage the economy, break election/manifesto pledges, incompetent - records, and claim/retain that crown for decades to come. A "can't be trusted with the economy" long term retort.

BUT! It could be all being engineered, a means to rapidly deflate away the UK's £2.5 trillion debt. Balloon it out to £4Tn, but see inflation (just another form of taxation) eroding that down to less than £1Tn in real terms, and where the central bank (BoE) holds a large chunk of that (and returns all interest received from those Gilts back to the treasury). Economy sorted, from a new low base (so growth), but where all savers/pension pots and house prices have seen large scale value confiscations.

[JohnB]

We've never seen mortgage rates triple. The 89 crash was due to interest rates rising 0.55 times from 8.375% in 1987 to 14.875% in 1989. Nobody under 50 can imagine those sort of numbers, or if they can they just ignored the possibility as what alternative to a mortgage did they have when buying a house.

https://www.mortgagestrategy.co.uk/anal ... -rates-uk/

Sunak inflated house prices during Covid with his stamp duty holiday because he thought a house price crash unacceptable to the economy. At the very least that surge will be undone, and I expect much worse falls. I wish my nephew hadn't bought a house this year.

[Alaric]

The 89 crash was due to interest rates rising 0.55 times from 8.375% in 1987 to 14.875% in 1989.

There were numbers who couldn't afford this, particularly recent buyers, who threw the keys back at the lenders. A consequence of this was fire sale prices as lenders, banks and building societies sought to recover their loans. It may have been as much as a 30% to 50% drop as I think I can recall nominal values of "starter" homes dropping from £ 60,000 to £ 40,000 and detached houses from £ 160,000 to £ 120,000. The Council Tax band of 1991 is sometimes a clue when the house is old enouigh,

[Bubblesofearth]

Per therm prices have already increased from 60p to £5 levels - during summer months. Come winter and higher demand so supply/demand is inclined to see that rise substantially more.

Why? Oil and gas prices have just over doubled from their respective lows so why has energy gone up so much?

BoE

[1nvest]

Per therm prices have already increased from 60p to £5 levels - during summer months. Come winter and higher demand so supply/demand is inclined to see that rise substantially more.

Why? Oil and gas prices have just over doubled from their respective lows so why has energy gone up so much?

BoE

Commodity/Futures market prices. That with the onset of winter and increased demand might reasonably see prices being bid up considerably more. Only when supply outpaces demand might prices turn back down again. You're paying a current price that reflects what the suppliers paid back in time, I guess much the same as had you directly bought the Options contract for today's delivery 6 months ago. If current forwards have seen 60p to 500p a 8.3 times increase, and perhaps could rise another 3x increase under more extreme shortages (sold to the highest bidder), a 24x overall increase, then a prior average £1K/year household gas bill rising to £24K type possibility - but realistically that becoming too expensive for many/most, unaffordable and having to go without (cheaper to have riots in the streets and keep warm from having set cars on fire).

===

Greg Jackson, founder and chief executive of Octopus Energy

22 AUG 2022

Mr Jackson, who is calling for Government intervention ahead of further price cap rises, told BBC Radio 4's Today programme: "I think the spate of failures within the 29 companies that went bust last year, that was driven by gas prices roughly doubling. They're currently nine to 11 times higher than usual."

He called for the government to double its financial support or freeze the amount suppliers can charge for energy. He added: "Look, to put that in perspective, if this was beer, we're talking about the wholesale price being £25 a pint. People don't know what a therm is, but, underneath it, the price per therm has gone from 60p to around £5 at the moment and that's what's passing through to customers if we don't do something."

[Dod101]

Interest rates are up again although not quite to 7%. A mere 2.25% still quite a big increase.

Dod

[tjh290633]

Interest rates are up again although not quite to 7%. A mere 2.25% still quite a big increase.

Dod

Traditionally rates went up by 0.5% and fell by 0.25% at each step. The problem is that the Bank was slow off the mark and the increases were too low. We are seeing the effects in the exchange rate.

TJH

[pje16]

The problem is that the Bank was slow off the mark and the increases were too low. We are seeing the effects in the exchange rate.
TJH

More like the Bank ARE slow off the mark
Interest rates should have been raised to at least 3 or 4% back in June or July

[1nvest]

Per therm prices have already increased from 60p to £5 levels - during summer months. Come winter and higher demand so supply/demand is inclined to see that rise substantially more.

Why? Oil and gas prices have just over doubled from their respective lows so why has energy gone up so much?

BoE

Because much of immediate delivery high prices have aligned with many trying to fill up their reserves at around the same high price levels (panic buying).



The daft thing is that even if the UK was totally self sufficient on the energy front, in consumers paying commodity/global market rates for that - might as well not be producing any domestic energy at all. The difference in consumer prices would be very marginal.

Under good management/governance, self sufficiency on the energy front could be a massive advantage/benefit - as there are so many knock on benefits for the broader economy. But unlike Norway, the UK has totally wasted the advantages of having reserves such as oil/gas (very poor governance).

[Dod101]

Meanwhile although this is allegedly an investment site, the fact that market has tanked presumably as a result of the interest rate hike is totally ignored.

Energy costs are written about ad nauseum elsewhere.

Dod

[vand]

Meanwhile although this is allegedly an investment site, the fact that market has tanked presumably as a result of the interest rate hike is totally ignored.

Energy costs are written about ad nauseum elsewhere.

Dod

nothing to do with the rate hike. Everything everywhere is tanking.

Everything bubble -> Everything bust!

[Dod101]

Meanwhile although this is allegedly an investment site, the fact that market has tanked presumably as a result of the interest rate hike is totally ignored.

Energy costs are written about ad nauseum elsewhere.

Dod

nothing to do with the rate hike. Everything everywhere is tanking.

Everything bubble -> Everything bust!

Note that I wrote my comment early this morning.

Dod

[vand]

Meanwhile although this is allegedly an investment site, the fact that market has tanked presumably as a result of the interest rate hike is totally ignored.

Energy costs are written about ad nauseum elsewhere.

Dod

nothing to do with the rate hike. Everything everywhere is tanking.

Everything bubble -> Everything bust!

Note that I wrote my comment early this morning.

Dod

Personally I don't think the minutae of rate hikes or any degree of political jawboning makes any difference to how markets behave over a period of more than a few months. The market is going to go where it wants to go, and whether rates were hiked 50 or 75 or even 100 basis points may have made some particular pattern of wiggles on the intraday charts, but zoom out and the larger trends are driven by much more powerful cyclical and secular factors.

Wedsday's action was particularly funny - when there is a violent reaction to piece of news it is often a fakeout and can mark a short term reversal, but on Thursday it seemed like everyone was trying to frontrun everyone else - first the market was up on anticipation of some sort of dovish figleaf offered at the Fed Meeting, but then then it sold off in the afternoon... then sure enough we got the fakeout and it reversed violently and it looked like once again it was going to market a short term bottom... but then it reversed yet again to go negative and fake out the previous fake out.. Double/triple fakeout day. When the market is so short term focused it is best not to play the guessing game, leave it to the day traders, and just zoom out and focus on the long term.

[Dod101]

Meanwhile although this is allegedly an investment site, the fact that market has tanked presumably as a result of the interest rate hike is totally ignored.

Energy costs are written about ad nauseum elsewhere.

Dod

nothing to do with the rate hike. Everything everywhere is tanking.

Everything bubble -> Everything bust!

Note that I wrote my comment early this morning.

Dod

Personally I don't think the minutae of rate hikes or any degree of political jawboning makes any difference to how markets behave over a period of more than a few months. The market is going to go where it wants to go, and whether rates were hiked 50 or 75 or even 100 basis points may have made some particular pattern of wiggles on the intraday charts, but zoom out and the larger trends are driven by much more powerful cyclical and secular factors.

Wedsday's action was particularly funny - when there is a violent reaction to piece of news it is often a fakeout and can mark a short term reversal, but on Thursday it seemed like everyone was trying to frontrun everyone else - first the market was up on anticipation of some sort of dovish figleaf offered at the Fed Meeting, but then then it sold off in the afternoon... then sure enough we got the fakeout and it reversed violently and it looked like once again it was going to market a short term bottom... but then it reversed yet again to go negative and fake out the previous fake out.. Double/triple fakeout day. When the market is so short term focused it is best not to play the guessing game, leave it to the day traders, and just zoom out and focus on the long term.

I would agree with these comments and really it is almost better for all of us just to sit back and relax. The movements are probably more than just market noise but even so.......

Dod

[1nvest]

Meanwhile although this is allegedly an investment site, the fact that market has tanked presumably as a result of the interest rate hike is totally ignored.

Energy costs are written about ad nauseum elsewhere.

Dod

nothing to do with the rate hike. Everything everywhere is tanking.

Everything bubble -> Everything bust!

Relativity.
Hard US$ year to recent buys around two-thirds more FT250 shares.
Or buys the same number of shares at a 40% discount.

Start of year £/$ 1.35, recent 1.085.
Start of year FT250 23897, recent 17972