What caught my eye this week.
I get the impression people are already tiring of the endless inflation talk. But I find it hard to look away.
The stats just keep coming!
This week UK inflation hit 7% [1]. That’s a 30-year high and ahead of most economists’ predictions.
The old RPI measure of inflation is already at 9%. Some pundits think CPI could get close in just a month as energy rises kick in. Even the Office for Budgetary Responsibility forecast a peak of 8.7%, although not until the end of the year.
Unlike much of the financial shenanigans we market nerds get juiced on, high inflation is already hitting everyday life as much as it’s roiling the indices [2].
Most obviously as the Bank of England raises interest rates – extremely likely to rise to 1% next month and probably to double that by Christmas.
But also in once-benign backwaters, where we were lulled into a false sense of security by years of low inflation and near-zero rates.
Loan ranger
For example, The Institute for Fiscal Studies this week highlighted [3] how high RPI will send interest rates on student loans soaring:
…the maximum interest rate, which is charged to current students and graduates earning more than £49,130, will rise from its current level of 4.5% to an eye-watering 12% for half a year unless policy changes (the interest rates for low earners will rise from 1.5% to 9%).
This means that with a typical loan balance of around £50,000, a high-earning recent graduate would incur around £3,000 in interest over six months – more than even someone earning three times the median salary for recent graduates would usually repay during that time.
The maximum interest rate will later plunge, then rise again. Inflation is measured with a lag and there are other delays before rate rises – and a maximum rate cap – kick in.
It’s pretty complicated, but according to the IFS it should shake out as follows (red line):
[4]
The blue line is the IFS’ alternative policy of when to apply a rate cap. It argues for a smoother implementation on the grounds that breathless talk of a loan rate rollercoaster could put kids off going to university. (Though not before it used the word rollercoaster in the title of its own report.)
The whole mechanism is fiendishly complex. And apparently rate rises won’t affect most graduates anyway, as they don’t earn enough to pay off their loans.
See the IFS report [3] for the full details.
Cap in hand
Simon Lambert at ThisIsMoney [5] makes a case for quick action on the cap, regardless of how many graduates will be hit.
Not least because it’s already bad enough we send young people into adult life saddled with huge debts. (I agree [6]).
But a wider point is that none of this mattered too much in a 2-3% inflation and 0-5% interest rate world. With inflation heading to double-digits, the wheels start to come off.
You can readily understand how price and wage spirals get going as different groups call for special measures. I’m also surprised we haven’t heard about massive financial blow-ups yet, given the pace of developments.
Time will tell. For now, enjoy the Bank Holiday weekend perusing another bunch of great reads.
From Monevator
How Property Income Distributions are taxed – Monevator [7]
High inflation and stock market performance – Monevator [2]
From the archive-ator: How should you invest for your age? – Monevator [8]
News
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1 [9]
Graduates to be hit by student loan interest rate rises of up to 12% – Guardian [10]
Highest inflation in 30 years ups the ante on the Bank of England – Morningstar [11]
London house prices rise at fastest rate since 2016… [Search result] – FT [12]
…while rent in London hits a record £794 a month for a room – Yahoo Finance [13]
…and the price of a Freddo bar continues to climb – Essex Live via Twitter [14]
Wealthiest Americans pay just 3.4% of income in taxes, study reveals – Guardian [15]
Boris Johnson and Rishi Sunak fined for parties they told us didn’t happen – BBC [16]
[17]
It’s been a looooong time coming, but value is having a moment – Factor Research [18]
Products and services
Prepaid meter users feel early impact of the energy price hike – Guardian [19]
Should you invest in the Royal Mail’s upcoming NFT range? – Which [20]
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor [21]
Sky’s launches cut-price ‘social’ broadband tariff – ThisIsMoney [22]
Car insurance premiums rise to £68: how to save – Which [23]
Open an account with InvestEngine via our link and get £25 when you invest at least £100. Terms and conditions apply – InvestEngine [24]
Farmland homes for sale, in pictures – Guardian [25]
Job-swapping mini-special
To stay put in your job… – Morgan Housel [26]
…or not to stay put in your job – Banker on Fire [27]
Comment and opinion
Intelligent investing with Jason Zweig [Podcast] – The Investor’s Podcast [28]
The stock market as a Rorschach test – A Wealth of Common Sense [29]
House prices to fall? Definitely. But not quite yet [Search result] – FT [30]
Harnessing volatility: the rebalancing bonus – Portfolio Charts [31]
Hammered by volatility: the leveraged ETF episode – Elm Funds [32]
How Bill Gross created the modern bond market [Podcast] – Motley Fool via Podchaser [33]
The dangers of falling in love with a stock – Humble Dollar [34]
The great emerging markets debate [Podcast] – Bloomberg Trillions [35]
The grass is greener fallacy – Abnormal Returns [36]
Loss aversion across the ages – Klement on Investing [37]
Common investing misconceptions [Podcast] – Rational Reminder [38]
Retirees who live on cruise ships [Fornight old] – Conde Naste [39]
Market timing mini-special
Why market timing is near-impossible – Peridot Capital [40]
Mohamed El-Erian’s argument against market timing – Morningstar [41]
Crypt o’ crypto
Explaining crypto’s billion-dollar bridge problem – The Verge [42]
Bitcoin has never been more difficult to mine – Axios [43]
Inside the world’s biggest crypto party in Miami – ThisIsMoney [44]
Naughty corner: Active antics
Does Admiral deserve its 7.5% dividend yield? – UK Dividend Stocks [45]
UK stock ideas for the inflationary era – ThisIsMoney [46]
Why retail traders and investors should not over-diversify [Search result] – FT [47]
The case for owning US bonds when the Fed raises rates – Verdad [48]
Well-off DIY investors beat managers but not the market – ThisIsMoney [49]
Larry Swedroe: three reasons for value investors to be cheerful – TEBI [50]
Kindle book bargains
Hillbilly Elegy by J.D. Vance – £0.99 on Kindle [51]
Who Moved My Cheese? by Dr Spencer Johnson – £0.99 on Kindle [52]
The Art of Gathering: How We Meet and Why It Matters by Priya Parker – £0.99 on Kindle [53]
Why the Germans Do it Better by John Kampfner – £1.99 on Kindle [54]
Environmental factors
Seed banks: the last defense against a threatening food crisis – Guardian [55]
Mutations across animal species reveal clues to aging – BBC [56]
‘Sustainable’ investment funds falling short of expectations – Which [57]
Realpolitik mini-special
Trump, Putin, and the paradox of propaganda – Intelligencer [58]
Three ways the Ukraine war could escalate and drag NATO in – BBC [59]
No grand theory can explain the Ukranian crisis [Search result] – FT [60]
Boris Johnson and his “conveyor belt of lies” [Video] – Ian Dunt via Twitter [61]
Off our beat
The managerial obsession with busywork – BBC [62]
US cops play copyrighted music from squad car’s PA to keep videos off YouTube – Jalopnik [63]
And finally…
“When you are 80-years old, and in a quiet moment of reflection narrating for only yourself the most personal version of your life story, the telling that will be most compact and meaningful will be the series of choices you have made. In the end, we are our choices.”
– Jeff Bezos via Brad Stone’s The Everything Store [64]
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