Maybe not just a passing problem? Inflation.

Damn statistics and damn politicians don’t blend well together. After highlighting some of the obfuscation around the unemployment numbers recently, it makes sense to move onto another vexed question – what exactly is the rate of our inflation?

It seems that for our dear leaders our rate of inflation can be anything they want it to be ‐ but almost certainly not equating to our own personal cost of living. This isn’t necessarily a party political “thing” as all politicians seem to play fast and free with these figures.

The most recent measure used by our leaders is the Consumer Price Index (CPI) which is a monthly measured basket of goods necessary for our normal lifestyle. Somewhat surprisingly this includes flat screen televisions, which are hardly key to my way of life, but extremely useful for introducing lower inflation as - like most technology - they get cheaper. So at a time when everything else seems to be rising it is nice to have a counterbalancing item! On this basis we probably should all have at least twelve
of these screens in our houses by now.

More realistically there is also the old Retail Price Index (RPI) which includes a broader range of costs including cost of housing, mortgages and council tax. The CPI according to last week’s figures is currently running at 2.5% which is ahead of the target of 2%. The RPI however was nearly double that in February but has come back a bit to 3.8%.

Additionally there are also some personal inflation calculators which you can use to access via the Office for National Statistics or the Telegraph websites. As a result of my own calculations I have found that my personal inflation rate, the not so well known U‐SPI, is over 7%.

In fact these figures seem remarkably tame when you consider what costs have been rising around us. Obviously commodity prices have had their effect with, in the past twelve months, pasta up 81%, rice up 61%, along with eggs 47% and butter 62%. Add to this energy bills effectively doubling for many and life has got a whole lot more expensive. Additionally for those coming off fixed rate mortgages, they are likely to see a possible doubling in the monthly mortgage payments despite recent rate cuts.

So inflation is under control? Maybe not. Price rises at these levels will inevitably feed through to wage claims. Ministers seem to think that we are so dim that we will think a 2% increase is a real increase – no, we are not the dim ones. Secondly a slow down or recession in the UK and US may depress prices temporarily in the short term, but will rebound once demand rises again. Finally, I have the impression that some politicians quite like the idea of “a bit of inflation does you good”. Let’s nail this. Inflation is fool’s gold in that it can devalue debt, but it is a cancer which devalues both wealth and the economy, as so perfectly demonstrated with the British economy of the 1970/80’s. Beware the insidious cries of the Siren called inflation, she will surely drag us towards the economic rocks.

Turmoil in the financial services sector – feast or famine?

When stories about the banks and building societies break out of the business pages you know they have a problem: but when those same banks and building societies make it to the front page, then you know we have a problem.

The tremors in the financial markets have taken on the proportions of an earthquake, with previously solid and highly respected organisations shown to have cracks and faults on the proud edifices. From certain red-faced Swiss bankers having lost their immutable reputation, to some of our domestic behemoths having to apologise for their costly errors, the financial landscape has been devastated - and this is only the beginning. After the damage of the shocks, now comes the reckoning.

As part of this, if we were to take a forward view of this industry, it will in all likelihood reveal a very different picture of the market players some three years hence. Some famous brand names may well not be around any longer, or if they are, probably only as a convenient badge for their new parent.

However, in previous years many will recall that such takeovers and mergers might well have provided a great opportunity for investors to benefit from takeover bonuses and windfalls. Unlike those years back we are now in a very different situation. Instead of aggressive purchases to “enhance shareholder value”, many banks and building societies are now in a straightforward struggle for survival.

You will have seen the record rights issue from the RBS and no doubt there will be others following shortly. This means shareholders will have to dig into their already stretched pockets to retain their level of investment by buying more discounted shares. Although this may lead to better profits for shareholders at a later date, it will be feeling very painful for the moment.

However, there are also other organisations that are under greater pressure, and they may not have the luxury of being able to tap the market for funds, especially if their business model is now regarded with some suspicion. This will mean further mergers and takeovers amongst the smaller mortgage banks and building societies but this time there is unlikely to be any premium payment or windfall.
More blood than bonus I suspect.

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And finally………my lack of faith in local authorities has been confirmed by the actions of Yarmouth Council. A retired elderly lady of the town was somewhat surprised to find that not only had her pension and benefits had been stopped but they had sent a letter telling her that she was in fact dead. Not satisfied with her phoning quite often to confirm her continued existence they insisted on visiting her to check that she really was alive – what did they do? Poke her with a stick?

Have a good weekend and enjoy Passover.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited

This article represents a personal and lighthearted view from Director, Justin Urquhart Stewart of Seven Investment Management Limited, and is based on current financial news and events around the world. Its content should not be used for investment purposes and you should contact an independent financial adviser before making any investment or financial decision. Seven Investment Management Limited is authorised and regulated by the Financial Services Authority. Member of the London Stock Exchange. Head office: 23 Austin Friars, London EC2N 2QP. Telephone 020 7760 8777. Registered in England and Wales number 4092911. Registered office: 3 More London Riverside, London SE1 2AQ.