Tag: inflation

Inflation & The Plight of the Honest Saver

Author
Angus Dent
Date

Anyone clinging to the belief that their deposits with the bank, building society or National Savings are holding their value must surely have received a wake-up call this week with the news that inflation hit 2.3% in February. At this level – the highest since September 2013 and already ahead of the Government’s 2% target for the year – the purchasing power of their money is going backwards in real terms. Furthermore, those looking to take advantage of the new National Savings Bond announced in the Budget only two weeks ago may stop to consider that the 2.2% on offer from next month for a deposit of £3,000 will effectively render them a loser from Day One.

As for those with money in traditional, easy access deposit accounts paying 1% or less, their cash is being eroded at an alarming rate of knots. And the use a tax-free ISA wrap does not even come close to bridging the gap.

The sad thing is that, while honest savers stoically see the value of the nest egg slip away by stealth, they are encouraged to believe that they are protected by the Financial Services Compensation Scheme (FSCS). They are protected, of course, if a bank or building society goes bust, but, since that will probably never be allowed to happen, the safety net is largely an illusion – and a cruel one at that given that the FSCS does not protect them from good old-fashioned inflation, which is the real enemy. Bank and building society depositors may not be losing their capital in one hit, but they are losing part of its value with the passage of each day.

The fact is that, even if they wanted to, the banks are virtually powerless to do anything about the plight of the saver – their access to cheap capital through deposit and current accounts to pass on to borrowers at astronomical rates of interest is what they live off. In modern parlance, they have very little ‘wriggle room’ because of their structure and overheads.

With interest rates glued to rock-bottom for the foreseeable future and inflation on the march, consumers are being forced to look at the various alternatives, such as P2P loans, where the market is young, ambitious and nimble. Risk is obviously – and very understandably – a big factor in many consumers’ minds, but returns of up to 8.5% with a good measure of security are not only available, but also sustainable in the current market. The advice must surely be to look around, research what is available, from whom, and to spread the risk by not putting money in one place.

In ArchOver’s case, the money will be lent out to ambitious, creditworthy SMEs through a robust risk assessment process. Surely, that has to be better than just sitting back watching the value of your capital gradually slip away.

Does the UK’s low inflation present an opportunity for UK SMEs?

Author
Angus Dent
Date

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Despite UK interest rates plumbing historic lows, inflation fell negative this April for the first time since 1960. This is plainly an unusual occurrence, particularly in the face of such expansionary monetary policy, and has led some public figures to fret that it could be a “canary in the mine” of the UK recovery; a symptom of some underlying economic malaise. In truth though this gloomy outlook seems largely unwarranted, and Mark Carney has forecast that this deflationary blip will be forgotten by the end of year when inflation, he believes, will sit above 1%. Indeed, he has already been partially vindicated by news that inflation is now positive again – albeit at just 0.1%.

The Bank of England forecast should sooth fears of a Japanese-style deflationary spiral then. But this near-deflationary environment will likely remain a reality for the next few months. So will this period pose opportunities or threats to SMEs? Unsurprisingly, the answer is not entirely clear-cut.

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A low inflation environment certainly can bring many benefits to businesses, such as allowing them to capitalise on static costs to make large purchases at favourable prices. In fact, a recent poll published in Economia found that just under one third of SMEs plan to increase capital investment in the next 12 months, so it seems many small business directors have already acknowledged this. Most businesses will also benefit from energy costs remaining constrained, whilst those in the manufacturing sector specifically will profit from steady input costs. On the consumer side, the brief drop into deflation may act as a shot in the arm for business, with people’s increased purchasing power stimulating spending. And speaking more generally, the next few months will provide SMEs with a chance to reflect and streamline their expenditure in preparation for the point when inflation appears again and margins are squeezed.

So far, so good then. But at only 0.1% inflation a brief slip back into deflation remains a possibility, and this could be problematic. Most worryingly, a second dip could pique the thrifty instincts of consumers, causing individuals and businesses to postpone purchases in anticipation of lower prices rather than cashing in on good prices now. Whilst current forecasts make this seem unlikely, the message for SMEs is clear: take advantage whilst you can.  

Inflation / Deflation and the Great British Shopper

Author
Angus Dent
Date

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Deflation, or indeed the threat of deflation is supposed to defer spending as people wait for prices to fall before making purchases. With inflation at or very near to 0% the risk of deflation is high.

Economists and the Bank of England are divided on how to address the threat of deflation. Traditionally a rise in interest rates will cool inflation and the economy with it. And a cut stimulates the economy as it drives up demand. So what to do.

It seems shoppers may have rescued the economists from their dilemma and……gone shopping. As the FT reported:

“Britons went on a shopping spree last month as prices on the High St fell by the most on record, dispelling fears that the UK is on the brink of a deflationary downward spiral”

Hooray for the Great British shopper!!!

Quantitative Easing – Too Blunt an Instrument?

Author
Angus Dent
Date

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Maybe I’m not the only person who grew up in the 70s who finds a great irony in governments now trying to stimulate inflation. Just as they had little idea how to control inflation I doubt that Quantitative Easing (QE) is the best way to stimulate it. A more targeted approach is required, an approach that will do more than increase asset prices, an approach that might get industry and economies growing and growing faster.

Yesterday the European Central Bank (ECB) announced a larger than expected two year program of QE in the expectation that this will avoid continued deflation in the Eurozone. While QE is likely to be successful in this limited aim, it is possible that despite QE the UK will suffer a period of deflation, the lessons from the UK and the US suggest it will do little else.

QE in the UK and the USA, and arguably already in the Eurozone, has increased asset prices. Maybe it has even created an asset price bubble, if it has then as night follows day, bust will follow bubble. What QE has failed to do in any meaningful way is to:

  1. get capital into businesses, particularly smaller and medium sized businesses – the engines of all economies,
  2. increase the buying power of consumers, there is some evidence that wages are growing again now, but generally wages have not increased these last several years,
  3. increase productivity, which by some measures has fallen, this may be linked to 1 above, and is the largest single problem facing the UK economy today.

There are many restrictions on government, national and / or EU, passing money direct to companies and direct to their citizens. However as part of the program to avoid deflation greater emphasis should be given to this. If commercial banks won’t lend to any but government and the largest corporations, and the evidence of the last few years is that they won’t or have forgotten how to, then government sponsored development banks, programs for state aid and AltFi businesses should be given more of this money to do so and stimulate industry. Giving more money to consumers is relatively easy, reduce personal taxes. In consumer lead economies its nonsense to take money away from those who drive effective demand.

Of course there’ll be cries that this approach is unfair; the Germans may well be better at state aid than the Greeks for example. And taxes are for national government not EU, so there will be a disparate approach. There’s also a question of how to make sure there’s value for money from the investments made. Then again there’s little value from QE, beyond possibly a small amount of inflation.