Gold News

UK Inflation? Blame It on Brexit

Or so everone says, ignoring Germany, commodities, Sterling and inflation itself...
BREXIT speech from Theresa May aside, currency traders also got new UK inflation data on Tuesday, writes Adrian Ash at BullionVault.
They seem to think it all means Sterling should rise from this week's new 3-decade lows versus the Dollar.
Perhaps that's because, as everyone from Bloomberg to the BBC claims, traders think May's promise to let Parliament vote on the final Brexit deal means that quitting the European Union and its single market won't prove a catastrophe.
Or maybe they suddenly think Brexit is going to be great...just beautiful...for the Pound, thanks to May's promise to bake, take and graze on as much cake as we like.
Or maybe FX traders imagine Bank of England interest rates are going up.
Y'know, to head off that upturn in the cost of living... upturn solely due to last summer's shock Brexit referendum result, according to that half of the media and pundocracy now classed as Bremoaners by the other 51.9%.
Chart of real British Pound gold price (adjusted by CPI) vs. real Bank Rate (adjusted by CPI inflation). Source: BullionVault via BoE, ONS, LBMA
Never mind that Germany's consumer-price index rose 1.7% in December from a year before, faster than the UK's, the fastest pace in 3 years, and the sharpest month-over-month rise on record for the Eurozone's No.1 economy.
Never mind 2016's global rise in commodity prices either, nor last year's 15% plunge in Sterling's global trade-weighted exchange value, almost 10 times the apparently concomitant rise in inflation.
No, it really is thanks only to Sterling's plunge, and therefore to the Brexit vote as the BBC puts it, that December 2016 showed the fastest year-on-year rise in the UK's Consumer Price Index since June 2014.
Maybe we should thank Brexit for the fastest wage growth since autumn 2015 too? Rising at 2.8% per year, however, average earnings have now outstripped the rising cost of living for 27 months running on the Office for National Statistics' data. Last June's referendum result didn't start that.
Besides, CPI inflation at 1.6% per year is still running below the Bank of England's official 2.0% target.
Inflation also stands only a little above its 5-year average, and it comes markedly below its longer-term average of 2.6% since comparative records began in 1989.
So alarm bells are not ringing on Threadneedle Street, whatever Governor Mark Carney may have said this week. Especially not with the Bank's CPI target remaining a symmetrical target – meaning it can overshoot as often as it undershoots. Especially as this pop higher still extends a very long run of undershoot.
And especially not with the Bank stuffed full of quote the brave Brexiteer spooked into keeping rates low to try and keep the lights on as the UK stumbles blinking and blinded into its bright ex-EU future.
Even at this modest pace meantime – as savers know all too well – official inflation still runs well ahead of bank deposit rates. It came almost 1.4% ahead of the Bank of England's key interest rate last month, the widest gap since January 2014.
Adjusted for annual inflation, real UK interest rates bottomed at -4.7% per year in late-summer 2011.
So the Bank of England might let this run much further yet. Especially as Brexit hardens into reality.
Economic cause-and-effect is complex, and way more complicated than Bremoaners or those delightful Faragists would claim. But the impact on savers in contrast looks all-too plain, whatever your politics.
Anyone looking to defend a little of their money from this risk might like to note the relatively simple relationship between real interest rates and the real value of gold bullion, as shown on our chart above.
Chart of real silver price in British Pounds (adjusted by CPI) vs. real Bank Rate (adjusted by CPI inflation). Source: BullionVault via BoE, ONS, LBMA
More active traders might want to speculate how silver prices could respond versus the Pound if UK interest rates lag further behind a rising rate of inflation.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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