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Weekend reading: When is an inflation target not an inflation target?

Weekend reading: When is an inflation target not an inflation target? post image

Good reads from around the Web.

I have not been alone in wondering whether politicians and central bankers might someday look to cure the world’s debt problems via a burst of high inflation.

Paying off a massive debt with a little bit each month takes ages. Run inflation at 3-5% for a few years, however, and you’ve got a big ally in whittling away your borrowings. Inflation was the Help to Buy scheme enjoyed by our parents and grandparents.

As things have turned out though, most inflation measures have remained subdued in the wake of the financial crisis. Indeed, fears have as often turned to deflation.

Asset prices have arguably been inflated, especially government bonds. But their resultant low yields only make the little sense they do in a world in which investors believe that central bankers will at least keep inflation in its bottle, and where there’s also a fear of stagnation.

What if markets are wrong about all this? What if after years of hysterical commentary about hyper-inflation and returning to the gold standard and – each and every month for the past seven years – the bond bubble being called to burst but doing no such thing, everyone has become complacent just at the moment when central bankers finally play their hand?

What if the governor of the Bank of England just said:

“Our judgment in the summer was that we could have seen another 400,000 to 500,000 people unemployed over the course of the next few years … so we are willing to tolerate a bit of overshoot in inflation over the course of the next few years in order to avoid that situation, to cushion the blow.”

Only in the face of a persistent rise in inflation would the central bank raise interest rates, Carney reportedly went on.

Ding dong

I am definitely not saying Carney just rang the bell at the top of the UK bond market (though I’d get a lot more traffic if I did do that every three months).

For what it’s worth I spend more time warning people against second-guessing the bond market than I do predicting its reversal! People, especially over-confident blog commenters, have been wrong, wrong, and wrong again. Far better for most to invest passively with a strategy that doesn’t rely on them being right about such things.

But Carney’s aside does make me a tad nervous, and wishing I had a big, cheap mortgage. Maybe it’s time to bite the bullet, despite loony house prices and the banana skin of Brexit.

Have a great weekend!

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: Opening an Innovative Finance ISA is set to become a more realistic proposition, reports The Telegraph, after peer-to-peer provider Lending Works became the first major platform to win full approval from the FCA. The platform is currently touting an interest rate of 4.2% for money lent for three years, rising to 5.2% if you stash your cash for five years. As always, riskier than normal savings, even with that FCA approval.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • Vanguard: “We’re nudging investors away from their UK bias”Telegraph
  • When indexing goes too far – MarketWatch
  • Why the falling pound has helped your shares soar – ThisIsMoney
  • Swedroe: More reasons to diversify across factors [Geeky]ETF.com

Active investing

  • A profile of ‘The Oracle of Oxford’, Neil Woodford – Bloomberg
  • Takeover tips: “Earn 40pc” when US firms buy these companies – Telegraph
  • Hedge funds fail across asset classes… – ETF.com
  • …indeed so many hedge funds, so little alpha – Bloomberg

A word from a broker

Other stuff worth reading

  • Interactive Investor has acquired TD Direct Investing – Citywire
  • SIPP customers stung as firms increase fees – Telegraph
  • Merryn S-W: Cloud over pound has silver lining [Search result]FT
  • Buy-to-let is still booming – ThisIsMoney
  • How two ETFs lost 90% of their assets in a day – ETF.com
  • Does a price war loom for [US] ETF providers? [Search result]FT
  • Are computers are setting us up for disaster? – Guardian
  • A more optimistic take on AI – Vox

Book of the week: Regular reader Gregory – who often points me towards all kinds of useful stuff – has now flagged up Your Complete Guide To Factor Investing, a new book by Weekend Reading regular Larry Swedroe and co-author Andrew Berkin. According to the publisher: “By the end, you’ll have learned that, within the entire ‘factor zoo’, only certain exhibits are worth visiting and only a handful of factors are required to invest in the same manner that made Warren Buffett a legend.” (Beware the 800lb gorilla!)

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  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []

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{ 35 comments… add one }
  • 1 FI Warrior October 15, 2016, 12:42 pm

    It’ll be fascinating to see what Carney does next, apparently he’s at the point where he has to decide whether to stay on or go, assuming the new regime still want him at the helm. In his shoes, I’d be tempted to grab the lifeline and run while nobody knows the ship is taking on water, then whoever grasps the nettle next will get the blame when the economy tanks. As always in life, it’ll come down to the outcome of a collision of the compatibility of everyone’s motivations, most of which are secret, colliding with the relative power of the combatants.

    As for going for broke in buying a home in what must be one of the hardest markets in the world to second-guess, well, it’s always going to be a gamble, maybe more than usually so given events at present resulting in more variables than normal to consider.

    So, you have to look into the mirror and ask yourself the question ”Do I feel lucky?” 🙂

  • 2 ermine October 15, 2016, 12:43 pm

    > 3-5% inflation

    Have you no ambition? We’ve known 26% around the Winter of Discontent ISTR. Over the 20 years I paid off my mortgage the average Bank rate was 6.5% and it was near 14% for a year or so. Hopefully those big cheap mortgages will dry up, perhaps mortgages will get smaller, you never know 😉 Some of that inflation is baked in right now, due to the 15% fall in the pound due to you-know-what. We import more than half our food and energy.

  • 3 Dorf Diva October 15, 2016, 1:31 pm

    Dear Monevator,
    I love you.
    Thanks for the great round up every week!

  • 4 Gregory October 15, 2016, 1:33 pm

    That’s very kind of you:). By the way foreword by Cliff Asness. According to Larry it will be available in kindle format in 2 weeks.

  • 5 Gaz October 15, 2016, 1:38 pm

    Apologies if this has already been talked about, but earlier this week I read that Vanguard are going to start offering investments directly to customers in the UK: https://www.moneymarketing.co.uk/vanguard-set-compete-hargreaves-d2c/

    Although a lot will depend on their minimum investment, I’m interested in it as someone who exclusively holds LifeStrategy in their portfolio – thanks to Monevator 😉
    Vanguard say they want to compete with HL – by ‘compete’, I assume they mean charge lower fees?

  • 6 Olivier October 15, 2016, 1:52 pm

    Not sure on your conclusion on property. It all depends on what sort of “inflation” you expect ? 1) general asset price increase 2) wage increases due to a tight labour market 3) actual consumer price inflation ( generally measured excluding most housing costs ). If 1 or 2 then why not bet on property. But if what you expect is 3) due to the pound falling and imports costs going up, then to the reverse you would expect housing-related costs and house prices to fall down due to more of people’s budget being eaten by expensive imports.

  • 7 The Investor October 15, 2016, 2:08 pm

    @Olivier — Yes, I wouldn’t be buying a house because I expect prices to rise much. (I never expect London house prices to rise much, and have been wrong for years). It would be simply to get the debt as some protection against high inflation. Unfortunately getting multiple six figures for any other asset but property is hard. (I’ve tried! 🙂 )

  • 8 Curious Sarah October 15, 2016, 2:32 pm

    “Inflation was the Help to Buy scheme enjoyed by our parents and grandparents.”

    ! You’ve still got the knack Mr Investor! 🙂

  • 9 Martyn October 15, 2016, 3:56 pm

    I note Carney said he won’t take instruction from politicians. I would settle for him not being an unelected one!

    Currently I think he ‘s a prisoner in a jail of his own making. It’s only option to control inflation is put up interest rates. Since he’s literally and incorrectly just decreased them, he couldn’t put them up without looking like a muppet. From hearing him speak I’ve concluded he has a very high opinion of himself, he could never be wrong.

    From an economist’s perspective the lower pound and him running the QE printing presses means inflation is going up. So Carney is getting his retaliation in first.

    On the ground I think inflation rises will be hard to push through, Unilever attempted it this week and Tesco took the companies products off it’s shelves until it folded, in the supermarket space with a price war going on any attempt by a supplier to hike prices is going to get a robust push back. Taking Tesco, it has 1.8% profit margin it simply can’t absorb any price hikes, so it will fight tooth and nail to prevent them. On the other side of the equation is wages, will Carneys QE feed into wage inflation? Can’t see it myself. Buying lots of Bonds puts money into the hands of the owners, which are institutions and city traders, not the great unwashed. If the people aren’t getting pay rises then they are not in a position to pay more and hence will seek cheaper alternatives or go without.

    At the moment I think inflation will tend upwards but not by much. Certainly not as much as Carney thinks.

  • 10 K. October 15, 2016, 5:09 pm

    Carney must leave. He has been political appointee by previous administration. His actions clearly demonstrate that interests of UK are not his interests. Bring King back !

  • 11 The Investor October 15, 2016, 7:33 pm

    @FI Warrior — I think Carney will ultimately stay. These guys don’t do these jobs for the easiest life, and the chance to be in the history books must be some motivation. (Though I suppose a cynic might say he exited Canada before things went pear-shaped… then again despite prophecies of doom they haven’t yet gone pear-shaped in his absence…)

    Regarding London houses… I know! It’s a six-dimensional chess game made seven-dimensional by Brexit, and I’ve never been very good at it. Wish I’d followed my old dad’s advice and just “bought somewhere because you can’t do wrong with property” back in 2003 now, instead of trying to be clever and miserably failing! 😉

    @ermine — Yes, agree inflation is definitely inward bound, at least assuming we don’t lurch into recession and even then we’re probably talking stagflation. Much depends on the Balance of Payments deficit! Re: What kind of inflation, @Olivier’s points are very valid. High inflation that doesn’t increase wages (or that only does so with a very long time lag) might well make the big-debt-to-erode strategy less attractive.

    @Gregory — No Sir! Thank you! 🙂

    @Curious Sarah — Aw, thanks!

    @Gaz — Hadn’t seen that, thanks for the heads-up. Will alert my co-blogger!

    @K @Martyn — I’d give Carney a pass grade so far, and certainly don’t agree with the typical Brexiteer view of him as some self-sabotaging doom merchant. I do question on what authority he’s saying he’s going to decide to run inflation hotter than target, but I suppose he feels that after years of coming in under target he’s got some buffer to get back to target, via averaging the lows and highs! 😉

  • 12 The Investor October 15, 2016, 7:35 pm

    @Dorf Diva — Oops, how could I miss you. Thanks! *blush*. (Currently single! Ha ha. 😉 )

  • 13 Marked October 15, 2016, 9:09 pm

    Interesting comments on houses. I do believe they’re meaningfully going down now and tide changed in mid-September. Only a gambler could guess for how far and how long they go down for, but I think already asking prices are 5 to 8 % down since June in south east at least, plus house stc then back on the market seems quite common – albeit at their previous or tad lower price.
    Of course now is the best time ever to get a 10 year fixed rate which cushions any potential price reductions once you’ve bought.

    TI has some great links to why to buy a house (despite not taking the plunge himself….. Yet). You never know he may buy one, get married, have kids and morph into the Accumalator one day

  • 14 FI Warrior October 15, 2016, 10:05 pm

    @Marked, I don’t know, it’s so difficult to judge, I’m in a really nice town in the Thames Valley corridor, I’ve been here ~7 years and in the beginning nobody would sell because it was so highly sought after. A couple of years ago the bubble prices brought out a rash of ‘for sale’ signs and my landlord also rushed to cash in his chips before the referendum, but mistimed it and in this area nothing sold for the next 3 months outright, it was amazing.

    I’ve had 4 viewings here in 4 months, whilst just before the referendum, the comparable house opposite had that in one day and sold in a couple of weeks; but viewings seem to be recovering now, so I don’t know if the scare is over or if it’s just a dead cat bounce.

    If I was buying now, I’d want one hell of a discount to take into consideration the plummeting £, Ok, this is the SE, but it’s still not London, the dirty money (keeping prices high whatever) doesn’t often make it this far out. I’m thinking to sit it out until at least the end of the year and then fix for a decade before the serious inflation hits, eye of the storm.

  • 15 zxspectrum48k October 16, 2016, 9:18 am

    I can’t get overexcited about inflation risks in the UK. Inflation breakevens have risen around 90bp since Brexit, and are close to a 5 year high, but that still only puts the 5-year, 5-year forward breakeven at 3.3%. The inflation is cost-push due to sterling weakness, rather than demand-pull. Unless they see second-round effects coming through in core inflation and/or believe that higher inflation expectations are becoming entrenched, the BoE is correct to look through such a rise.

    What I’ve found more interesting from Carney’s recent talks is that he is echoing other central banks (Fed, ECB, BoJ) in discussing the the limits of monetary policy and the need for government to take up the challenge of low growth/deflation through fiscal/structural measures. There seems to be some concern that negative/zero rates and low/flat yield curves are risking financial instability (increased leverage, ALM pension issues), drive social disparity (through asset inflation) and might be exacerbating weak aggregate demand (by raising saving rates). Finally!

    Most relevant is that if bond yield curves do bear steepen (we’ve seen that already in the last month) then does this trigger equity markets to tank? Equities have increasingly acted as “bond proxies”. If equities do fall due to higher bond yields, will central banks step back in to inject liquidity? I hope central banks have the backbone to let asset markets drop but frankly I doubt they do … they will blink again.

  • 16 Neverland October 16, 2016, 10:03 am

    Carney will stay

    He asked for a shorter 5 year term so he could have a shot at Canadian pm. That post is now taken

    I think May would probably like to get rid of him like she did every other person Cameron/Osborne appointed. However the timing from the point of view of the plunging pound and now rising gilt yields would be awful

    Therefore he will stay for a normal eight year term, much that it pains me

    In terms of consequences he was very happy to do nothing in the face of near five per cent annual inflation a few short years ago

    If companies are minded to push up prices because they see demand as inelastic in the U.K. I don’t think the Bank of England will do much

  • 17 Neverland October 16, 2016, 10:11 am


    The effect of expiring sterling fx hedges is only just working itself through real company’s supply chains

    The whole of Western Europe is a no growth cash cow for most multinationals

    Just raising prices seems quite logical. It’s just a matter of extracting the most feathers from the goose with minimum hissing

  • 18 SemiPassive October 16, 2016, 11:49 am

    Back around 2009 the Bank of England had to write several letters to the CofE when CPI inflation nudged 3%. They only have to forecast that it will drop back closer to 2% in the medium term, which was done repeatedly, and thus no need to raise rates.
    And don’t forget the BoE hold about nearly a third of gilts or something which will cushion a gilt selloff to a degree.
    I guess a lot depends on when GBP devaluation bottoms out. We may already be there, or it could go to 1.10 or even parity with the dollar.

    I can’t see wage inflation in my industry (IT/FinTech), there are big deflationary forces through offshoring, outsourcing & intra company transfer abuse, investment banks shrinking their IT teams, etc.
    But counter that with current mortgage rates of 1.5%, and if you need a house and want to pay it off by retirement age then you don’t want to wait until your 50s to buy.

  • 19 K. October 16, 2016, 8:51 pm

    The problem with Carney that he lost credibility. He showed himself as a puppet of the deep state who brought him here. UK does not need a puppet, it need a leader at this difficult time…

  • 20 Learner October 16, 2016, 9:48 pm

    Inflation indexing seems completely divorced from reality.. for example, the CPI gives more weight to restaurants or transport than to housing costs. An index that vastly underweighs the largest household expense can’t be a useful indicator of real changing costs.

  • 21 John B October 16, 2016, 10:16 pm

    @learner, CPIH does include housing costs, but it never features in the media, which has always puzzled me, as how can anyone claim inflation is 1% if 1/2 household income is spent on houses rising at 8%

  • 22 Martyn October 17, 2016, 9:12 am

    @Investor – you and he both have the same political view of the EU. My point is we are not paying him to act upon his politics, we are paying him to make the right calls. He’s not been making them.

    His decisions are based on his predictions, his predictions have been politically motivated and wrong, hence by extension, even though it’s too early to actually tell, those decisions must also be.

  • 23 L October 17, 2016, 12:20 pm


    Vanguard already have a d2c offering if you have £100k to invest. They don’t, however, offer any of the tax advantaged wrappers that we all know and love. If Vanguard can provide my ISA and the funds to fill it, this could be a game changer for me!

  • 24 The Rhino October 17, 2016, 12:27 pm

    If vanguard want to compete, they won’t have to try too hard if they pick HL – hard to get more expensive than them if you’re into funds. If you’re into ETFs then its a different story with HL being a much more attractive prospect.

  • 25 John B October 17, 2016, 2:28 pm

    Indeed, HL hold my Vanguard ETFs for free outside my pension, and charge £200 pa to hold them inside it. I think that’s fair recompense for their excellent customer service, and I can’t see how Vanguard could justify the costs of developing an equivalent web portal. At least the threat of competition will stop HL introducing ETF charges, as they could see all their passive investors disappearing

  • 26 Neverland October 17, 2016, 2:45 pm


    If you think central bank governors aren’t picked to be the sock puppets of the government of the day you are naive in the extreme

    Carney’s problem is that he was George Osborne’s sock puppet and George Osborne is Trotsky to May’s creditable Stalin impersonation, as she throws our economy under the bus to maintain her control of the Conservative party

    May’s problem is that this would be a particularly inopportune moment to further disrupt the established status quo of UK monetary policy

    Likely result is he continues to be overpaid and over here

  • 27 The Rhino October 17, 2016, 3:52 pm

    @JB – I agree that HL are pretty much a no-brainer for shares (i.e. encompassing ETFs and ITs). Big solid company, reasonable prices and very good customer service – whats not to like? Applying their fund type ad valorem charges to shares would result in *all* share-holding customers walking regardless of their active or passive persuasion.. and they wouldn’t want that?

    It begs the question, who are the customers taking the shaft holding funds at HL? Oh yes, thats me with my SIPP. Balls! Need to do something about that..

  • 28 The Rhino October 17, 2016, 3:56 pm

    I remember they had a crack briefly by pulling ITs over to the ‘fund type charge’ side when they had their RDR charges overhaul. I think it lasted about a day before they folded..

  • 29 Olivier October 17, 2016, 7:11 pm

    You can access Vanguard and other ETFs through HL, but they’ll charge you 1.5% on FX on ETFs not listed in the UK/in £. If going direct to Vanguard cuts this then great.

  • 30 FI Warrior October 17, 2016, 9:38 pm

    Please excuse my lack of knowledge on this point, but is it possible to open a bank account in the UK with a European bank based here, so you can shift your £ into euros to stop your cash buffer evaporating away with every next political gaffe. (e.g. Handelsbanken?)

    A bonus would be that if you’re one of the ~3 million European nationals resident in the UK you could have your money safe to withdraw anywhere in Europe if your (purely) UK bank accounts were closed without warning. Equally if you as a Brit wanted to retire in an encouraging European country, in the Med for example with their pension tax breaks for UK nationals, (like Portugal’s extremely generous ones at the moment) that would also make it easier to get it out of an ATM machine there without losing on the exchange rate.

  • 31 hosimpson October 17, 2016, 11:47 pm

    For a while now developed world’s central bankers have been wishing hard for inflation. Remember back in the day when QE was a radical new idea and everyone (myself included) was frightened that the entire thing would spiral out of control and into a (knock on wood) stagflation. How wrong I was. In retrospect, I think it was the currency — global capital was supposed flow out of the developed economies that were printing currency and into the (hmm…) emerging markets. But the emerging markets failed to emerge quickly enough, so we ended up with a bit of a property bubble in China, a short-lived mining and commodities boom, and a lot of money without a home, which promptly sloshed back to the US and Europe and I recon that’s what’s held their currencies up.
    The world turned out to be smaller than we thought it was back in 2008. I have little reason to believe it has grown much in these past 8 years. There’s a lot of capital out there with nowhere to go, and especially so since everyone expects China to debase its currency if the USD and EUR begin to slide. The other problem with China, of course, is capital controls; in the past these didn’t tend to end well.
    So say even if GBP reaches parity with USD, unless there’s a serious hike in oil prices, I wouldn’t expect inflation to exceed 5%. And even if there is a serious hike in oil prices, well, we can always frack Yorkshire, can’t we?

  • 32 Anon October 18, 2016, 1:00 pm

    @FI Warrior:

    Not opened one myself but Barclays certainly does foreign currency accounts http://www.barclays.co.uk/Otheraccounts/Currencyaccounts/ForeignCurrencyAccount/P1242557963858 (costs can be found on a PDF linked from that page; the euro one has no quarterly “maintainance fee”).

    If you’ve actually got the “cash” sitting on some online broker platform, a simple solution may be to park the money into a money market ETF e.g list at https://www.justetf.com/uk/find-etf.html?groupField=index&assetClass=class-moneyMarket . I did look into that pre-Brexit but actually ended up using a short-dated high-yield global bond ETF instead (yes, more risk and a bit more TER, but at least some of that sweet sweet yield to show for it). Of course there’s some cost involved with an ETF (spread, TER) and other risks (not being covered by FSCS etc) which don’t come with a bank account… but then you’d probably take a significant hit moving GBP into (and eventually back from?) a euro-denominated bank account.

    At this point, for me, such maneuvering all seems a bit stable-door-horse-bolted though. If all the “GBP was overvalued” narrative is right (something I find more convincing in the form “GBP was overvalued if you take into account that the country was about to go collectively insane”), then I’ve had the luxury of buying up swathes of global assets over the last couple of decades with my much-overrated-by-Johnny-foreigner pounds, and couldn’t have picked a better time to walk away from my now much devalued in global terms salary and move on from my accumulation phase to drawing more on income from past global investment. We’ll see. The contrarian in me is thinking it maybe worth directing (some of) what remaining investable income I do have at UK small caps (an area I’ve avoided overweighting beyond the slim exposure that comes from tracking the AllShare) and maybe more UK property over the next few years as all this plays out.

  • 33 L October 19, 2016, 9:05 am

    I read a comment left yesterday on an article in Professional Adviser or similar that stated that Vanguard’s US offering was approximately 0.3% for platform and fund charges – does that sound about right for anyone with knowledge of this part of the world? If so, it would make a real difference to the UK, where even a ‘cheap’ fund of funds will set you back c. 0.5% in charges.

  • 34 Tim October 19, 2016, 10:54 am

    @L Looking over Vanguard’s UK offerings’ OCFs at https://www.vanguard.co.uk/uk/portal/investments/all-products I see 0.24% for the multi-asset LifeStrategy (and also the new Target Retirement things) down to ~0.1%-0.2% for equity-only passives. It’d cost say £100 p.a to hold that in an account on a flat-fee broker like (see http://monevator.com/compare-uk-cheapest-online-brokers/ ; £80-£90 maybe more accurate but say add a tenner for a yearly lump-sum dealing fee). For even LifeStrategy, so as long as the sum you’ve invested is greater than x where x*0.003>x*0.0024+100 => x*0.0006>100 => x>£166,666, then your total platform and fund charges are sub-0.3% of assets invested. The cheaper Vanguard funds will have an even lower threshold for overall costs to be sub 0.3%. So entirely doable by FIRE-ers in the UK too.

  • 35 Michael October 20, 2016, 9:10 pm

    Merryn King, The End of Alchemy:

    Now that official interest rates are virtually at zero, an even more extreme version of forward guidance has been proposed by some economists as a way of stimulating the economy. The idea is that central banks should promise to allow inflation to go above their normal target at some point in the medium term so that real interest rates – nominal rates less expected inflation – can fall to more negative levels, so stimulating spending. This is a counsel of despair and is literally incredible. Suppose businesses and markets believed that inflation would indeed be higher in the future and that the resulting lower real interest rate did indeed stimulate recovery. The central bank would then be faced with the following dilemma. Should it proceed to allow inflation to rise above the target despite the recovery, or should it be grateful for the recovery and then set policy to keep inflation on track to meet the target? It is not hard to see that for any central bank governor the latter would be more attractive than the former. Markets will anticipate that reaction and so not believe that inflation will be allowed to rise above target. But then real interest rates will not fall and the recovery will not take place. The strategy of promising to generate an inflationary boom is ‘time inconsistent’; in other words, what you say you will do in the future is not what you will want to do when you get there.

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