December 2021 – Future inflation thoughts

Last month I noticed what I think is the beginning of inflation telling on my monthly budget. A gradual creep over the year in the amount we spend each month on food, energy and general household goods. This has been in the news as well, with inflation apparently running at a decade-high 5.1% in November (1, 2, 3). The BoE don’t think this will change in the short term, with forecasts of >5% for 2022, before dropping off into 2023 and beyond (2, 4).

The comment pieces on this news are all over the place. On one hand you get people like Chris Dillow of the Investors Chronicle (5). He reckons the BoE are overstating the risk; the inflation is due to higher gas prices, and gilts and commodities prices do not suggest there is much fear of ongoing inflation, whilst increased price pressure will weaken pressure from spending, and there really is no wage-price spiral as a shortage of decent staff pushes up salaries (5). At the other side of the argument are people like Merryn Somerset Webb (6). She argues surveys (I hesitate to call this data) from the British Chambers of Commerce showed most (66%) of businesses are worried about inflation, and while 30% say this is due to wage growth, 94% blame raw material price increase (6). This is reportedly due to increases in oil and gas prices, and they aren’t going down any time sooner because everyone is going renewable too quickly (6). Hogwash.

While I don’t agree with Merryn Somerset Webb’s “all aboard the coal train” bandwagon, I do agree that inflation isn’t going away. In my naturally bearish state I am concerned that the BoE is under-weighting long-term inflationary causes. Two points on this. First, all the CPI inflation graphs people refer to seem to go back to the late 80s/ early 90s. Inflation isn’t a modern thing, we’re just measuring it with the CPI now. The fairly fun in2013dollars.com reckons since 1920 the pound has had an average inflation rate of 3.86% (7). Actual proper peer-reviewed papers peg inflation since the mid-1950s at median average 4.3% and mean 5.90% (8, 9). So our current 5% looks like a reversion to mean. Five percent inflation (and theoretically associated interest rates) is not something the BoE wants, but might be good for national debt. For the rest of us debtors, 5% mortgage rates could pinch a lot of those stretched salary-multiplier high LTV mortgages, and rid us of some of the zombie companies floating about.

Point two. What is in the CPI. Have you ever looked at the basket of goods the ONS uses? It can be bloody weird, but seems like a fairly decent mix of households (10). Wholemeal loaf and dehydrated noodles, fair enough. Liver and canned meats, not round here. Rent costs for housing, materials for maintenance like MDF, bedroom furniture, and a new smartphone. That feels fairly normal. There’s a lot of items, but I’d encourage you to have a look.

The important point here is it’s not just about gas prices or wage growth. This is all the bits of stuff people buy or spend on. The price of laptops, the latest Apple watch, the latest Samsung smartphone, etc have all gone up because of chip shortages. That doesn’t seem to be easing. Same problem applies to new cars, and has driven up the price of second hand cars. Rail prices are going up faster than inflation. Air fares have gone up. Rent prices have gone up – have you spoken to anyone trying to rent recently? In our local area it seems to be almost impossible. One of my junior colleagues has been looking for nine months for somewhere suitable, staying with a friend in the interim. Brexit and COVID has meant fewer people available for hospitality, services and transport work, driving up wages (3). The headlines might be lawyers and lorry drivers, but everyone I’ve spoken to seems to be struggling to get staff.

And add-on the sustainability element. Fast fashion is in for a certain portion of the population, but for many it’s firmly on it’s way out. See the rise of Depop and Vinted, the fashion amongst the generation below me of reuse and recycle. On/re-shoring and difficulties with international shipping (COVID, Suez, Brexit, general fuel cost) means that it’s much more expensive to get stuff to the UK now. People can’t get raw materials or finished goods in. Food prices have continuously fallen over the last decade, meaning even as wages have stagnated many families have not noticed inflation on their food bill (11). It’s got cheaper thanks to cheap labour from abroad for UK farms, and cheap food imported from abroad. Farmers have been squeezed to the point of barely breaking even – watch Clarkson’s Farm. Both of these drivers are disappearing. This affects the poorest in the population most, as food makes up a greater proportion of their total spending (11). Food prices are going to start increasing, because the only way they can get cheaper is if farms become even more commercialized as agri-businesses, with lower welfare standards and quality in the face of fairly paltry Government replacements for EU subsidies (12, 13, 14). The alternative is importing more food, which is harder and more expensive due to Brexit. Or people pay more for better quality, more sustainable produce, the way that some public opinion is blowing.

So that’s my long-winded rant about why I’m adding £50 to my weekly food budget and monthly energy spend rather than a future eating soylent green and ChickieNobs in the dark. We can afford it. I’m going to account for 4% annual inflation in my future calculations. After a decade of low inflation and low interest rates, times they are a-changing.

December Finances

Checking the assets and liabilities:

These are taken, as always, from my Beast Budget spreadsheet. I saved (a surprising) 34% of my salary, bolstered by some locum work. I have also finally managed to clear my credit card. I’m not quite unsecured debt free, there’s about £1000 of 0% credit for a kitchen, but not too shabby. Savings this month were in cash and cryptocurrency – more on this in my Q4 review. If you fancy a free share, sign up to Freetrade with this link (I also get one).

Budgets:

• Groceries – Budget £200, spent £297.80, last month £348.68
• Entertainment – Budget £100, spent £31.93, last month £206
• Transport – Budget £250, spent £258, last month £349
• Holiday – £150, spent £0, last month £0
• Personal – £100/ £272/ £199 – Christmas gifts
• Loans/ Credit – £50/ £512/ £445
• Misc – £50/ £207/ £153
• Fees – £300 /£233/ £494

In the garden:

Found an old paraffin greenhouse heater in the garage. Played with it. Need more paraffin.

Happy 2022!

The Shrink

References:

1. https://www.ftadviser.com/your-industry/2021/12/15/uk-inflation-hits-highest-level-in-decade-at-5-1/
2. https://www.forbes.com/uk/advisor/personal-finance/2021/12/15/inflation-rate-update/
3. https://www.bbc.co.uk/news/business-12196322
4. https://www.theguardian.com/business/2022/jan/02/what-does-2022-hold-for-the-uk-economy-and-its-households
5. https://www.investorschronicle.co.uk/news/2022/01/04/a-year-of-falling-inflation/
6. https://www.ft.com/content/fce4a625-aa74-46fa-9a62-7a0cb72993d6
7. https://www.in2013dollars.com/uk/inflation/1920
8. https://www.sciencedirect.com/science/article/pii/S1042443110000429?casa_token=tOEF5yB9oWcAAAAA:ljC2hDbKPqIFpHynk8cOmzfcPgaBO_gER06hI5LJa93VBxCmO5-PS7zDTW9M0RYi3X7INx0
9. https://www.tandfonline.com/doi/full/10.1080/1350485042000200169?casa_token=fCJsOkOUJbEAAAAA%3A76hVL-P5ZqSKjbTP4HVDFsK16aC8Q1Geyv_69prSYdeNhzpJRqPYi5w4qx0LlRIQVFzJPipNEw
10. https://www.ons.gov.uk/economy/inflationandpriceindices/datasets/consumerpriceinflationbasketofgoodsandservices
11. https://www.gov.uk/government/statistics/united-kingdom-food-security-report-2021/united-kingdom-food-security-report-2021-theme-4-food-security-at-household-level
12. https://www.theguardian.com/business/2022/jan/05/grocery-inflation-adds-15-to-britains-christmas-bills
13. https://www.theguardian.com/environment/2022/jan/06/farmers-should-stand-their-ground-with-supermarkets-on-fair-prices-minister-says
14. https://www.theguardian.com/environment/2022/jan/09/farm-subsidy-plan-risks-increasing-the-uks-reliance-on-food-imports