For the full version of Bank of England governor Mervyn King’s letter to Chancellor Gordon Brown, click here:
https://www.bankofengland.co.uk/publications/news/2007/044.htm
At MoneyWeek we’ve been waiting for the dollar to be two to the pound for months and we’ve been predicting a rise in the consumer price index to above 3% for just as long. Then both things happened on the same day! We were never alone in our conviction that the dollar would weaken this year – fundamental and technical analysts across the world have all been waiting for the breakout. However, we have felt pretty lonely on the inflation prediction – few people expected CPI to go this high. We’ve looked at why it has in some detail on page four, but the real question now is how much higher it will go from here.
Gordon Brown wants us to think it will now fall back – in his reply to the explanatory letter from the Bank of England this week (which you can read by clicking on the link at the beginning of the article), he stressed the impact of what he clearly hopes we will all think are temporary factors – oil and food prices – in the numbers. But even if you accept food and oil prices might not keep going up (which for reasons we’ve often gone into here, I do not), I can’t see how you can not be concerned about the CPI. Prices are rising across the board. It isn’t just utility bills. It isn’t just carrots (though they have risen 238% in price since 1997). It isn’t just sofas and it isn’t just haircuts. It’s everything. Inflation is back and, barring a sudden contraction in the money supply or some such, my guess it that it will be with us for a while.
This is all very bullish for precious metals, so if you still aren’t holding gold, now is the time to start doing so (for more on this, see our investing in gold section). However, it isn’t good for anyone already struggling with debt, anyone who has too big a mortgage and anyone who is relying on their house to pay for their future. When we had our last Property Roundtable back in February, I asked our participants (all of whom were bullish) what would make them nervous about the market.
The answer was unanimous – interest rates at 6%. Well, they’re 5.25% now and the market is already pricing another half per cent rise by the end of the year, so there’s only a tiny quarter point to go before – by the bulls’ reckoning – the carnage begins. I’m guessing a good few property owners have some sleepless nights ahead.
On the plus side, these owners will not include my small family. We have finally managed (after three years of effort) to persuade someone to take our Paddington flat off our hands and are about to move into rented accommodation around the corner. We’re thrilled: we’ve got a satisfactory pile of money in the bank, we’re getting to live in a house we could probably never afford to buy and, best of all, we don’t have a mortgage, so we don’t care how much interest rates go up, or indeed how much house prices might fall as a result. I find this a very relaxing situation to be in. Simon Nixon thinks I’m nuts. As far as he is concerned, it’s the renters who should be having the sleepless nights.