Winners and losers of recent government and Bank of England decisions – Two B’s

On Thursday of this week the Bank of England makes another Bank Rate decision which I fear will be a repeat of the last year which is a hold at 0.5%. Additionally, we are now getting close to an election so I thought it a good time to stop, take a step back and just look at who the winners and losers are of the current government and Bank of England decisions in the lead up to Thursday.

UK Property Market – February 2010 Update

I am still yet to buy myself a flat or house even though the ownership of one is important to my retirement investing strategy in the longer term. I have now for the time being even stopped looking on the internet at house prices in the area that I am interested. The reason for this is that in my opinion UK house prices are still overvalued by a huge margin. Last week the Nationwide reported that average house prices had fallen from £163,481 to £161,320, a monthly fall of £2,161 or 1.3%. On an annualised basis house prices in absolute terms are still up annually by 9.2% and if I look at real (after inflation) returns they are still up by 6%.

Buying Gold

As I postulated here I made the decision on Wednesday to buy more gold. As with the last time I bought gold, the buy was not big at 0.6% of my total retirement investing assets. The trade was made by moving cash to gold rather than with new money. At the close on Friday gold had reached £733.01 (Note: I have a gold priced in GBP widget on the right hand side bar widget of this blog as I follow it closely) which means that even allowing for buy/sell spreads and trading costs I am up on this buy decision by 2.5%.

A home for cash

UK Retail Prices Inflation (RPI) is currently running at 3.7%. This means that if you are a UK basic rate taxpayer that to just stand still you need to be earning interest of 4.63%. It’s even worse for higher rate taxpayers, you need to be earning 6.17%.

So what’s available out there? A quick look at MoneySavingExpert shows that the best ‘clean’ account, which is one that plays no tricks like introductory bonuses or withdrawal penalties, is paying interest of 2.5%.

This means that even with this account the basic rate taxpayer is every year is losing 3.7% - 2.5% + 2.5% x 20% tax = 1.7% of purchasing power on their cash holdings and the higher rate taxpayer is losing 3.7% - 2.5% + 2.5% x 40% tax = 2.7%. So if you are a prudent saver you are being punished while if you are in debt up to the eyeballs your debt is gradually being eroded by the wonderful [sic] inflation that we are seeing. This is thanks to the Bank of England base rate of 0.5% plus the great management that the government is showing.

I’ve protected myself as well as I can by having a significant portion (17.6% of total assets) of the low risk (cash and bonds) portion of my current low charge portfolio in NS&I Index Linked Savings Certificates which is giving me a real positive return. Unfortunately a new Issue of these has not been offered for some time and so I can’t put any more money here.

A little over 3% of my cash is sitting offshore in a ‘clean’ account paying interest of 4.25%. I’m losing money in real terms daily however at least it’s better than the best UK ‘clean’ account rate of 2.5%.

The remainder is in a ‘clean’ UK based account paying 2.1% interest. This is losing significant purchasing power however I feel powerless to do anything about it. I see no option at the moment but to sit tight and hope that one day my prudence is rewarded. Does anyone have a better option?

As always DYOR.

US Inflation – February 2010 Update

The above chart shows the Consumer Price Index (CPI-U) to January 2010 courtesy of the Bureau of Labor Statistics. Year on year inflation has fallen from 2.7% in December ’09 to 2.6% in January ‘10. Annualising the last 3 months and inflation is running at 0.0% and annualising the last 6 months has inflation at 1.2%. It looks like the US has their deflation ‘problems’ under control for now.

I have taken the liberty of dividing the chart into two sections. The first red section runs from 1871 to 1932 and the second blue section runs from 1933 to present day. I chose this break point as during 1933 the US officially ended their link to the gold standard. I think this chart demonstrates a point that government will always choose to inflate debt away at the expense of savers if given the chance. They could not do this under the gold standard.

To demonstrate this arithmetic mean inflation rates have been:
1871 to 1932 CPI = 0.5% with deflation being a regular occurrence.
1933 to Present CPI = 3.7%
The CAGR CPI from 1871 to present has been 2.1%.