Inflation rate stays at 8.7 per cent.

[the other bob wilson]

Not good news for borrowers or mortgage holders.

https://www.theguardian.com/business...tion-unchanged

[JamesWales]

It's not good news. I think inflation will undoubtedly fall, and one months data is only one months data, but for it to fall over the year, you expect it to be falling every month.

The more obvious impact, as you say, is on mortgages as interest rates will now very likely rise tomorrow, and it sets an assumption they will rise next month too.

Longer term, I guess it helps bring down house prices and there's some evidence of that. The problem with ultra low interest rates is it really did entourage people to not be overly concerned by paying £10k over the asking price etc, as fundementally they could afford it. That is now much less likely to be the case.

I renewed three months ago, and felt unlikely. I feel slightly luckier now

[Keyser Soze]

It is not good news for business, and therefore employment either. What is worrying, or will worry people when it happens is the discussion of whether it will be a "soft landing" or avoiding recession altogether. The World Bank, IMF and Treasury have been horrific failures in their forecasts. Best to go with history and hard data, and a probability call based on them, in understanding the way forward.

What we do know
For me, there are three historical facts that stand out, and yet although not common knowledge, but can be verified.

*. Whenever US inflation has gotten above 4.5% and the Fed have tightened, there has never been a "soft landing", only a "hard landing". We are there.

*. In order to cure inflation, central bank rates have had to be 1-2% above inflation. This has been the Western norm until 2008 GFC. Since 2008 rates have been below inflation. This is financial repression as the real value of our money dies every year, until interest rates are above inflation. History shows that rates need to exceed the inflation rate to get it down. Until then, inflation will remain and the chance of interest rates rising higher will only increase.

*. Due to trade links, if the US goes into recession, so do we.

So where are the US and UK?
Currently, the US leading indicators (the best predictors) of a recession are indicating that a recession should land around June-August. It has looked a dead cert to me for six months. At the moment, the UK Conservative government are stuffed because on the one hand they may be leaning on the Bank of England to slow rates down ahead of the election, but by doing that they allow inflation to let rip. Alternatively, if they aggressively raise rates ahead of inflation they risk aggravating a deeper recession before an election (I don't think they will avoid it anyway), and will then be hung out to dry for economic incompetence. Either way, to be they are screwed.

Keep in the back of your mind that typical recessions last six to eighteen months. Can be ones lasting two to three years. So it is about surviving for that long if you are on the edge.

Other impacts
It is not just mortgages and credit cards that are at stake here. That in itself will be painful. Rising interest rates also hurt many, many asset classes such as:

1. New small business who borrow to get going. Marjorie's Muffins, Tony's Tea Cakes, Peter's Pizza's - many of these will go under. Layoffs.

2. Private Equity (owner of Boots, and many other high street businesses). These operate on a MBO / LBO leveraged buyout model. Typically 60-80% of business are run on debt. What happens when interest rates rise, debt matures / rolls over and consumer demand falls? Job layoffs or total business going under (mass layoffs).

3. Venture Capital / Angel investing - this has really boomed since 2008 due to low rates. Now rates are scorching upwards, not only will the SMEs backed by these people be struggling, but the debt lend to them will become more expensive. Job layoffs there or total business bust.

4. Shares. At the moment the stock market is not doing too bad but is volatile. But inflation, if not tamed, combined with interest rate rises, are prone to fall historically. Same reasons. Demand falls. Jobs laid off. At a sector level, the most cyclical are the chemical, construction and retail sectors. These have already fallen really hard.

5. Bonds. Unbeknown to many, bonds make up many pension portfolios. While rates rise, the income value will rise but the values of the bonds will fall. I know quite a few people questioning why their pensions have fallen. Defined benefits pension should be fine. Other. Not so good.

6. Corporate bonds / junk bonds - the crisis for these industries also happened in the very late 1980s and early 1990s. This will be a replay. Cyclical industries who are leveraged will be smashed.

7. Commercial real estate. Again, sensitive to rates. I have advised a few good friends to exit any investments related to this since last September, as rates were rising. Most did, some didn't. The pain is now here. Google what is happening in London, New York and San Francisco on commercial real estate. The bloodbath is only just starting. Job layoffs will happen there.

This is being painted in the media mostly as a borrower / residential mortgage issue. The trouble is that most people do not know economic history and have no recollection of higher / rising interest rates and its corrosive effect on the above asset classes.

The easy money and cheap money times are over. Those who have been borrowing it and spending it on consumer spending have wasted their time, and have now put themselves in a weak position. Some say we are back to the 1970s. I don't think it is that. Looking at all the data, and recalling my financial history, I would say we are likely back to 1988-1994. Unemployment will rise above 5%, and repossessions much further up, but it will take 6-18 months to see that. It always does. Trying to look at unemployment or repossessions now is useless - it is a lagging indicator and always has been. Tough times. Cash being short.


Positivity
On the flip side. Anyone who can invest and trade wisely, and come through the storm, will be in a handsome position to dive in to the above asset classes and make a killing. In my view this will be a better opportunity than post 2008 to make an absolute shed load. Caution for the moment, but excitement for the medium - long term.