Tuesday, October 14, 2014

Economic stagnation

Every silver lining has a cloud.

Inflation appears to be at a five-year low at just 1.2% y/y. This means the purchasing power of my wages isn't as weak as could have otherwise been the case. Combine this with the fact that my main two expenses (petrol and rent) aren't ticking higher, and it means my disposable income isn't in bad shape, relatively speaking. I imagine this will be the case for the majority of commuting workers.

But there are clouds, lots of them:

- Low inflation means interest rates will be lower for longer. The key point here is that the Bank of England would likely want to see inflation pick up quite strongly before jacking up rates - because of this lag, savings can be expected to earn close to negative real rates in the near term.
- Also, the chart below shows how our wages haven't been keeping up with inflation for six years. Even if we are optimistic on wage growth from here on, there is a lot of catching up to do before celebrations are warranted.
- If we aren't earning anything by parking money with the banks, maybe we can make our money work for us? What about investing in the FTSE? Doh, the index of the UK's largest stocks has been tanking over the past few weeks. What about property? It's so expensive that it's out of reach for most people, and prices look to be continually supported by low interest rates!
- Maybe we should just go on holiday to forget about our troubles...that's all good and well but the pound has been falling quite sharply on the back of a weak growth-low interest rates story, so things are getting increasingly pricey abroad!

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