Are the cracks starting to show in the Bank of England’s unspoken strategy

I’ve been suggesting for many months now and most recently here that the Bank of England want inflation which they think they can control. This is so they can allow the large UK government debt and the debts of the reckless general public to be inflated away (effectively a free bailout). Of course somebody has to pay for this and that will be the prudent savers amongst us. Additionally, keeping the Official Bank Rate at historic lows of 0.5% for so long, while allowing the inflation to occur, also helps the banks recapitalise themselves as they proceed to lend money out at rates far above this. Of course savers are again punished as the banks pay below inflation interest rates to the savers. So far (of course in my untrained opinion only) it’s all going to plan for the Bank of England except I saw a couple of cracks beginning to open this week.

Gold Priced in US Dollars (USD) – May 2010 Update

Within my Retirement Investing Strategy I currently hold 5.5% (up from 4.1% at the last USD gold update) of my portfolio in gold with a targeted holding of 5%. Gold is the only portion of my portfolio that does not provide a yield (dividends, interest etc).

Average UK Earnings – May 2010 Update

As we know inflation according to the retail prices index (RPI) year on year is currently running at 5.3%. This is the highest it has been since July 1991. Looking at historic RPI inflation data shows the average year on year RPI annual change since 1991 at 2.9% and the trendline since 1991 shows inflation year on year trending downwards. My chart today shows these RPI figures in blue.

Australian (ASX 200) stock market including the cyclically adjusted price earnings ratio (PE10 or CAPE) – May 2010 Update

To try and squeeze some more performance out of a retirement investing strategy that is heavily focused on asset allocation I am using a cyclically adjusted PE ratio (known as the PE10 or CAPE) for the ASX 200 to attempt to value the Australian Stock Market. The method used is based on that developed by Yale Professor Robert Shiller for the S&P 500. I will call it the ASX 200 PE10 and it is the ratio of Real (ie after inflation) Monthly Prices and the 10 Year Real (ie after inflation) Average Earnings. For my Australian Equities I will use a nominal ASX 200 PE10 value of 16 to equate to when I hold 21% Australian Equities. On a linear scale I will target 30% less stocks when the ASX 200 PE10 = 26 and will own 30% more stocks when the ASX 200 PE10 = 6.

US Consumer Price Index (CPI) Inflation – April 2010 Update

The above chart shows the US Consumer Price Index (CPI-U) to April 2010 courtesy of the US Bureau of Labor Statistics. Year on year the US CPI inflation index has risen from 213.24 to 218.009 which equates to 2.2% today (down from 2.3% last month). Annualising the last 6 months has inflation at 1.7% and annualising the last 3 months has inflation running at 2.4%.