What caught my eye this week.

Last week we lamented how much poorer we feel than a few years ago.

Inflation has watered down the real terms value of our investment portfolios like a cheap nightclub barman diluting away our drinks. It’s reduced the potency of every pound we spend.

Nevertheless it was still quite a bender we went on.

So we knocked back higher rates to sober us up. But that in turn has given us an almighty hangover.

The typically steadier bond market has looked particularly sickly. Watching bonds puke for the past 18 months has been akin to learning the day after a wedding why your prim parents don’t usually drink anymore.

The good news is that the sickness of inflation and the cure of higher rates could now both be at the point of not getting any worse.

Inflation actually turned a while ago. Meanwhile the Bank of England just held rates at 5.25%. Its mandarins are mostly confident this level should be enough to keep bringing inflation down:

Source: Bank of England

But who among us can live on good news alone?

Hard miles ahead

It’s worth noting that Bank officials are still saying rates might have to rise further.

Depending!

Besides, rates not rising doesn’t change the fact that they’ve already soared:

Source: Bank of England

Much of this dose of what’s good for us is yet to work through the economy.

For example, Labour cited research this week saying that another 630,000 homeowners will remortgage on to much higher rates between now and May alone.

The Financial Times has been running lots of stories about weak companies limping along on cheap debt that’s similarly due for refinancing.

And that’s not to mention entire shaky investment categories like private equity, which grew complacent and fat on nearly-free money.

With buyers for its portfolio companies drying up, some of those companies requiring more cash, and debt far more expensive than it was, private equity managers are having to get ‘creative’.

Which is a label in finance that typically only gets more specific when we discover how the wheels have come off.

Mapping out the future

Of course none of this is bad news, exactly, for central bankers.

In doing their calculations that rates are probably high enough, central bankers are presuming things will continue to slow down in housing and employment and with pay rises and the rest of it. And that this will continue to curb inflation.

It’s an obvious point, but enough punditry misses it to make it worth restating: you can’t look at the inflation chart above and say, “The Bank of England has done enough, inflation is already coming down, rates are too high!”

The forecasted fall in inflation is predicted on the current forecast for interest rates – which is that they will eventually go lower, but not next month and not back to zero.

Whereas if rates were to be cut prematurely because inflation is sliding, then the resultant pick-up in activity could arrest that slide, putting rate rises back on the table.

Along for the ride

For now though, the Bank of England seems to believe it has probably done enough.

Definitely maybe, as the world’s greatest pub rock band put it.

Similar narratives being told this week in central bank press conferences in the US and the Eurozone – plus some weakness at last in the hitherto unstoppable US jobs market – were enough to trigger heady gains for stocks and bonds.

So if you resolved not to look at your portfolio in the midst of the recent despond, be comforted it’s probably gone up a bit now.

Indeed a few more weeks like the last one and emotions could swing back to the fear of missing out.

Pretty hard to imagine from the vantage point of a fortnight ago, but markets are like that because people are like that.

Sitting out the guessing game and investing passively is much less stressful than riding this rollercoaster and trying to guess in advance its twists and turns.

For most people far more profitable, too.

When markets are down, just keep saving to take advantage of lower prices. When they rise, remember they’ll probably go down again, sooner or later.

Keep on keeping on.

We missed the last turn

Does that sound defeatist to you?

Well, recall that even central bankers were wrong-footed by the inflation shock – and looking out for that sort of thing is literally their day job!

Check out this graph of missed expectations from the Financial Times [Search result]:

Source: Financial Times

In sporting terms bankers whiffed it – the equivalent of sending a penalty kick high into the stands above the goal, or delivering a second serve into a ballboy.

And don’t think they have it easy now, either.

Raising rates to catch-up with suddenly-runaway inflation was a no-brainer.

Deciding when enough is enough is borderline guesswork.

From the same FT article:

Joseph Gagnon, a former senior staffer at the Fed who is now at the Peterson Institute for International Economics, says central banks are now at an ‘inflection point’ and that this is a point of minimum — rather than maximum — confidence in the outlook.

“When you know you’re behind the curve and you better raise rates fast to catch up, you have a lot of confidence that you’re doing the right thing,” he says.

“But then as you approach where you think you might have done enough, that’s when you’re less certain about the next move. That’s where they are.”

For market watchers this sort of thing is incredibly fascinating.

Not least because, as I wrote last week, asset prices will surge when investors are convinced inflation is beaten and rate rises are done.

As I say we got a taste of that with the strong rally of the past five days.

Finding our feet again

From a personal finance perspective though, whether the Bank of England keeps its Bank Rate at 5.25% or ultimately takes it to say 5.5% or even 6% is pretty irrelevant.

The journey has already taken us to a different reality. Arguably a saner one, but very different from where we began – one where you get interest on safer assets and there’s a real cost to borrowing money.

We’re nearly there yet, to answer the calls from the back.

But it will take us a while to get used to it.

Have a great weekend!

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