T-Rex to Heaven 17 …

Remember T. Rex ? Slade ? The Osmonds ? if so then you probably remember inflation too. Not inflation like we have at the moment that’s starting to cause some concern, I mean proper inflation.

If you’ve only been working for less than 30 years, then you will never have experienced real inflation. As measured by the Retail Price Index (RPI), inflation has averaged around 3.5% per annum in the last 30 years, against a background of 2% per annum average over the last 260 years (inflationdata.com).

Now from when the likes of Noddy Holder and Marc Bolan were strutting their stuff in 1973 until the new world of Echo & the Bunnymen, Heaven 17 et al in 1982, inflation averaged over 14% per annum.

In 1975, RPI was 24%. Yes really ! No wonder punk turned up, you couldn’t afford a new t-shirt so you stuck an old one together with safety pins. From 1973 to 1982 prices more than tripled. Bonds were decimated, remaining out of favour for years. Now that is inflation.

Pumping money into an economy, which the government has been doing, in billions, is fraught with inflationary danger. Like steering a large ship, it takes time for the effects to work their way through.  Putting the brakes on will involve similar delays. Inflation is now rising by design, and if it gets out of control we will all suffer. Higher inflation means higher bond yields to compensate, which means lower prices. Given the biggest selling asset class in the UK is UK fixed income, there may be trouble ahead. As for those holding money on deposit….

Most commentators are forecasting 4.5% inflation and more by next year. According to the Bank of England/GfK NOP Inflation Attitudes Survey conducted last November, the public expects inflation to be around 3.9% in 2012, and 3.2% and 3.3% respectively through 2012 and to 2016. If the great British public aren’t right, a systemic change in the trend for interest rates, and the general investment landscape, may be just around the corner. Still, maybe the music will get better.