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Time to take inflation seriously

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Philip Fisher sees warning signs around interest rates and worries about the consequences.

30th Sep 2021
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The economy, our livelihoods and perhaps even our homes are currently heavily reliant on an assumption that is beginning to seem increasingly open to doubt.

You need to be at least middle-aged and ideally approaching the status of senior citizen in order to remember the ravages that inflation can wreak on a country and its citizens.

Since it hasn’t moved for ages, most of us will be aware that the Bank of England base rate is currently 0.1%. In effect, this means that the bank has taken the view that there is no inflation.

However, at the same time, its economists are predicting that in the next few months we could see 4% inflation but their view is that it should then go down.

Given the news in the last week or two, where fuel and now petrol prices are going off the scale, there are shortages of goods and in some industries it is impossible to get staff, it might be time to begin factoring in the possibility that inflation and perhaps even stagflation could soon be a serious concern.

History lesson

Without going into great detail, for the last couple of decades UK inflation rate has been remarkably low. Last year, it was below 1% and for the last 20 years it has rarely been much higher than 2%.

Even 30 years ago, when it peaked the figure was 8%, which might sound frightening until you discover that in 1979 the number was 10% higher than that, while back in 1975 it didn’t fall far short of 25%.

What does this mean for the country?

As a result of the pandemic, the government has been spending like there is no tomorrow, or to be more exact that there will be no inflation tomorrow.

It can do this on the basis that the cost of financing debt is close to 0, given that interest rates are at all-time lows.

However, just imagine what would happen if the country suddenly found itself paying interest at 5%, let alone 10% or 20%. This would not be good news and would almost inevitably lead to even greater austerity.

And individuals?

Most of us couldn’t give a fig what happens to the country, though we will probably prefer to see primary services such as the NHS and the police and fire brigade keeping their heads above water.

What we really care about is our homes. This year, has seen an incredible rush to invest in the property market led by those incentivised by a government stamp duty giveaway that appears to have been completely unnecessary.

Back in the old days, when inflation was a serious issue, banks were reluctant to lend on the basis of more than three times salary and even then, expected homebuyers to stump up a healthy deposit.

That does not appear to be the case any more, which means that should interest rates shoot up then the vast majority of householders will be unable to finance their mountainous mortgages.

It doesn’t take a genius or even an accountant to work out the natural consequence, which will be evictions, downsizing, moves to rented accommodation or homelessness.

And accountants?

It has been pleasing to witness the way in which, to a large degree, the profession appears to have been practically immune to the worst ravages of the Covid pandemic.

Whether we will be cosseted in the same way if the economy goes sour is another matter. We have already had a snapshot of the consequences when there is a shortage of utility product such as gas and petrol, with businesses threatened and panic hitting the man and woman in the street.

With rampant inflation, or even what would have been regarded as fairly modest inflation in the days of yore, many of our clients will be struggling and if clients struggle, so do we.

Managing businesses is also easy when inflation is effectively zero. You charge your clients the same and tell your hard-working staff that there is no money to give them pay rises.

With inflation as a factor, it is necessary to increase rates to clients on a regular basis, while trying to judge appropriate increments for staff in order to keep them on board without breaking the bank.

Challenges ahead

We all enjoy challenges. Even so, most of us will probably be much happier to keep our heads in the sand and hope that like storm clouds, inflation decides to pass us by.

Replies (2)

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By Paul Crowley
01st Oct 2021 13:46

SSAP 16 likely to make a comeback?

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By DJKL
05th Oct 2021 16:59

Hurray- I loved the possible variants re accounting (not just SSAP16) when I studied the topic in 1984-85.

During the CA uni conversion course I took at Aberdeen Uni (back when to become a CA you needed a relevant degree) we spent a fair few weeks digging around re the concepts, investigating different valuation/recognition models, I even remember the tail end of stock relief circa 1987 re tax and I have a copy of Scapens "Inflation Accounting" somewhere in the house.

As far as I am concerned bring on inflation, I suffered from it when I was younger , during the late 80s, and had mortgage debt (albeit when I got married in 1990 we qualified ,via my wife's employment, for a capped mortgage-max 5%), now I have no debt and instead have savings I say rack up the interest rates as currently we earn next to nothing on our bank balances.

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