Yeah, the benefit of homeownership and fixed rate mortgages means there is some dampening of the wage/inflation spiral since a large expense is flattened. Unfortunately renters don’t get the benefit, and variable rate mortgages feel the interest pinch.
What we have in the UK is a complete failure to forecast inflation. BOE models pretty much all assumed mean reversion because inflation was “transitory”.
Take a look:
It looks like BOE lagged the FED by about 1%, but they are now caught up at 5.0% vs 5.0-5.25% right?
That really shouldn’t produce more than a 1% difference in inflation rates, all else being equal. Is the aggressiveness of the FED and their 75bp hikes the difference? Or is all of that just timing in the CPI calculations between the two?
Isn’t Brexit weakness in the GBP a big part of this?
Its a combination of things:
- Brexit caused labour market shortages
- Brexit drove GBP lower vs USD
So (2) drives up import inflation, while (1) causes nominal wages to go higher (chasing the higher levels of inflation).
BOE basically hiked too timidly (50bps), and this then allowed people enough time to adjust their behavior (ask for higher wages at current job or move to another job for higher pay).
In a labour shortage environment, this then combines to drive nominal aggregate wage growth upwards in a material way, which then drives inflation (that is also being amplified by Brexit factors such as import inflation), which is why the UK is now fully trapped in a wage price spiral.
Energy disruption from Russia’s invasion of Ukraine didn’t help things either.
Sure. But that shock has mostly passed. Cost of energy in Europe is back down again after a large stress & lagged effects (certain inputs will have higher energy costs now baked in on a forward basis but they are dissipating).
But import inflation is still material in the UK, and being amplified due to GBP weakness. UK imports 60% of its food, and we now have food inflation of 18% (vs 13% EU).
Restaurants & Hotels (energy, labour, food, rent) for example are extremely expensive now in the UK.
I knew the dependency on food imports was a factor. Have electricity costs declined/leveled off?
This is the part that gets messy.
- Wholesale energy costs have gone down (gas) to pre-Ukraine War times.
But due to the structure of the UK energy market (which is something out of MAD magazine):
- Electricity costs (based on marginal pricing which comes from burning gas, nuclear, and renewables) have gone up.
and,
- We have standing charges in the UK (for gas and electricity), and these cover the costs of running the infrastructure and the costs of failed suppliers (over 20 failed over the last two years). These standing charges are now historically very high due to the many failed suppliers (billions of ££ losses).
So, if you combine (1) + (2) + (3), we currently have the cost of dual fuel (most common) running at about 50% more vs 2021 (pre-Ukraine War).
The energy contribution to inflation is definitely reducing now (slowly), the issue being the way energy is priced in the UK and the standing charges. As you can imagine the energy companies are now raking in many billions of £££, which is not sitting well with the population.
I have no knowledge of this program, but it sounds like privatize the profits and subsidize the losses. Ugly corporate welfare.
UK has dropped from 7th to 15th (2016 to 2022) in solar power generation.
https://en.wikipedia.org/wiki/Solar_power_by_country
I wonder if that’s due to too much cloud cover or political inaction.
It’s doing well in wind power, but lags behind Germany (which has 50% more land area).
Yes, the UK does well with wind power but the Conservative Govt here banned onshore wind to placate the NIMBYs (mostly over 60s).
Its basically become farcical at this point. We have a huge energy crisis, and we then get a bunch of people in power who banned the very energy technology (onshore wind) that can actually be deployed quickly and effectively in the UK. Instead, they keep banging on about offshore wind (years to set up), nuclear (decades to set up), or North Sea Oil (pretty much gone at this point).
The reason solar went down is because they cut renewable subsidies and the NIMBYs keep attacking solar panel installations near them (they block planning permission at the local level).
If this all sounds totally absurd, its because it is. The UK (since the Brexit vote in 2016) has become a complete mess.
UK was an early adopter, possibly close to maxed out due to tininess, larger-area developing countries caught up.
Years and years of economic and financial mismanagement in the UK by the Conservatives have led to the serious issues we are seeing today.
In the UK we have privatised utilities (water and energy).
Water companies are essentially network monopolies run privately. Over the past 15 years they have been systematically emptied of their equity, in favour of loading them up with cheap debt, in order to boost the expected returns of their owners (Canadian Pension fund, China Investment Corp, Macquaire etc)
Pre-2021, many had gearings in the 70-80% range, with a portion of that being inflation-linked debt. Essentially, the company was leveraged up to its eyeballs and was barely maintaining an investment grade credit rating.
The bad part?
They are now collapsing under the weight of that debt and their need to invest to upgrade the infrastructure (massive leaks and sewage spills)
Domino 1 will be the largest water company in the UK (Thames Water)
80% gearing (£14bn debt out of £17bn regulated asset base) and 20% of that debt happens to be UK inflation linked.
They are now effectively insolvent. The UK Govt will have to rescue them which means they will have to borrow more money to do so. And thats only one water company. There are several others in the same situation that could also fail.
The UK is in a serious downward economic spiral.
UK ministers hold emergency talks over Thames Water - https://on.ft.com/3NvYJhN via @FT
This likely reflects my lack of knowledge of UK politics and gov’t . . .
I know that the Royals are not to engage in politics, but what are the optics around a Royal acquiring the failing company (e.g., buying it) and overseeing its management back to a more viable company and then divesting themselves of the asset (e.g., selling it with limits set on the net profit it could make on the overall transaction)?
That would not go over well because the Royals downplay their enormous financial resources, given that they have a lot of audit and financial exemptions (it is quite a racket).
They would get a very bright light shown on their investment, which would then lead to more scrutiny of their own opaque finances, which is just about the last thing they want now. They usually stick to buying up land and properties at arms length.
RIP neo-liberalism, eh?
I was working in the UK when the Tories started privatizing the water companies. Even then I could not see any advantage to the consumer of such a change.
The first thing that happened was that the senior management of the water companies got huge pay rises and new perks as they now “had to compete with the private sector for talent”. A fatuous argument as these managers were basically doing the same job as before and the water companies had had no problem previously finding people to do the jobs at the former compensation levels.
The Tories also promised massive future investments in infrastructure now that private funds would be flowing into the water companies. Instead the private equity managers milked the water companies by taking out huge dividends.
A very sad situation but one that should have been foreseeable. As usual the taxpayer/consumer will pay in the end for the Tories’ follies.
This twitter thread below is worth reading as Richard explains the situation well.
The financial position of the water sector is so cosmically bad that it will likely take over 20 years to only fix a portion of the current sewage problems in the UK.
Beaches and rivers in England and Wales are now heavily polluted by sewage discharges. It has also become dangerous for adults and children to swim in the waters due to bacteria levels (which makes them sick).
https://twitter.com/RichardJMurphy/status/1674292465400946690
Murphy’s comments confirm my observations.
It is just a very sad situation for the UK and will ultimately cost much taxpayer money to fix, if a fix is even possible.
The torries will probably come in and “rescue” the utilities and then pat themselves on the back for “solving” this massive problem
I just hope on this side of the Atlantic that we are making adequate investments in our own utilities’ infrastructure. Time will tell….