At the time of writing, we are days away from the next Bank of England base rate announcement, and speculation is again hotting up on the strategy to rebalance the nation's books. U.K. inflation peaked in October 2022 at 11.1%, according to the CPI and some tough decisions need to be made on the severity of this year's rate increases. These worries have been further compounded by the release of figures showing a 16.7% inflation rate on groceries in the U.K. There is now hard numerical evidence that the U.K. economy is continuing to shrink, and that will become the central focus of the Bank of England's attention heading into February. In this week's blog, we run through some of the less publicised challenges facing the U.K.s top economic minds and how these challenges will affect the retail lending markets.
Outside of financial circles, inflation is widely seen as a bad thing, a stealth tax on purchasing power that creeps in over time due to dozens of factors. For example, it can be caused by specific logistical problems pushing up the price of goods in a crisis, i.e. supply chain distribution, or it can just be down to the very nature of central banking. To simplify a complex system, the money supply is continually inflated, meaning the more money in the system, the less value it has. In some scenarios, it's caused by the flow of money; during the pandemic, we saw a considerable widening of inequality where certain sections of the population became more affluent, leading to purchasing assets and bidding up the prices, another form of inflation. That's completely normal in a capitalist society; it's supply and demand economics, but what isn't normal is the wealth disparity of a G6 country being on a par with East and West Germany during the cold war. Finally, where we have seen an enormous run-up to double digits in the absolute level of inflation, it's a mixture of all three and many more factors.
However, one critical thing to remember is that the economy would collapse without inflation: it's hard-baked into the fiat system. This is because all the money in existence is essentially debt, so the bank needs inflation to erode the value of the debt over time, allowing that to be managed and more debt to be created. In addition, inflation leads to people spending more, not less, as people are generally panicked that prices will go up. Without inflation, if people stop spending because prices are too high, we get deflation, which destroys the economy far faster than inflation because it creates unemployment on an ever-increasing level and leads to the collapse of business infrastructure.
So the goal here is that you need controlled inflation. That tax continually re-services debt creation; it's ok to rob Peter to pay Paul, as long as Peter can bear the burden, the middle affluent. The problem is you need to do that without hurting the people whose purchasing power could be fatally diminished, the working classes and lower-income households. Otherwise, the scales tip too far the wrong way, and we end up where we are today. It's also important to remember you can't inflate your way out of debt. The people who own all this debt, their returns are ironically reduced by inflation, so they will fight for continuously higher returns on their bonds. Inflation simultaneously makes old debt cheaper to pay off but new debt more expensive, so it's a goal of treading water as a preference to drowning, trying to make everyone happy. Panmure Gordon, the U.K. investment bank, has speculated that they believe inflation in real terms will come down quickly, back within the target range by Q4 2024, which is in stark contrast to this week's media interest pieces, so for the public at least, there is some respite on the horizon.
House prices historically have an inverse correlation with inflation because it's an asset class that's reliant on debt creation. A bag of oranges may get more expensive when it's expensive to import oranges, a supply chain failure, for instance, so the price is bid up by the people willing to pay more. With real estate, historically, people have needed debt to make the purchase; when that becomes harder to obtain as rates rise and deposits dimmish, the demand also declines, and prices go down. However, that has yet to happen, and as previously touched on in other blogs, buyers are now competing with a new breed of HNWIs who either don't require mortgage debt or can obtain cheaper debt than retail via leveraging their existing assets, and the bag of oranges analogy suddenly becomes applicable.
So is it all doom and gloom? We don't really know; nobody does; a competent person is intelligent enough to realise how little they know, and that's why all of these blogs are subconsciously subject to the Dunning Kruger effect; however, In the world of economics, there is a way to mitigate for that. The Latin expression Ceteris Paribus is used when debating cause and effect; it allows you to isolate one single issue assuming all the other factors stay the same as they are now. Unfortunately, what's great for model making, could be better for reality, as what tends to happen is the thing nobody predicts, so things are never equal, all being equal. However, in making educated guesses as we do, we know that the level of money-chasing yields in the market is substantial and has to go somewhere. We believe it will continue to make property and asset classes backed by property, such as P2P lending, a desirable prospect.
Invest & Fund has returned over £140 million of capital and interest to lenders with zero losses, showing the rigour that governs our business.
To take maximum advantage of this robust and exciting asset class, please visit www.investandfund.com or contact Shaheel at shaheel@investandfund.com.
Don't invest unless you're prepared to lose money. This is a high-risk investment. You may not be able to access your money easily and are unlikely to be protected if something goes wrong. Take 2mins to learn more.