Supplement 19 May 24 – The Bank Uncovered

May 20, 2024

“The idea that the future is unpredictable is undermined everyday by the ease with which the past is explained.” Daniel Kahneman, RIP, the father of behavioural economics.

 

Before we get started, I’m delighted to say our next Property Business Workshop is already taking bookings and we’ve only 2 Super Early Bird tickets left. 

 

This time Rod Turner and I will be taking on: The fundamentals of property investment. Risk mitigation and control. Relevant investment metrics. Differing secured debt arrangements and loan structures – and – Scaling your property portfolio/business – why, when and how?

 

Thursday 4th July, in a Central London location (Blackfriars). Super Early Bird tickets are just about still available – and thanks to the early bookers who make it viable to book a room and organise the event – we reward them with 20% off! There are a 2 of those tickets still available here: http://bit.ly/pbwthree 

 

Welcome to the Supplement, everyone. I love this week each quarter as I get to go to the Bank of England regional breakfast briefing, and, in general and without trying to, make a nuisance of myself. I’m often surprised at what a very well educated and plugged in room DOESN’T understand about the current macro situation, as evidenced by their questions, and this week was no different. As usual, I also had some open (and after the event) questions of my own, and I will share the outcomes with you all – after I get through some of the parts in the Bank of England Monetary Policy Report that I now have a new slant on, thanks to the briefing.

 

Before we get into that, however, the macro feast as always. Last up – yep, you know it will be the 5-year gilt and swap yields, of course. First up, we have to get stuck into the ONS Labour market report and (un)employment in general. After that we need to lead in to productivity, and then I will spend the rest of the time just summarising what the main players at the Bank of England have said this week in some more detail than usual, because they’ve been particularly active. You’d be forgiven for being bloody confused because there are headlines about cuts, raises, holds, cuts soon, cuts not soon – and everything in between. I’m going to try and get to the bottom of that – or somewhere near it – before I get into the relevant parts of the report.


The bonus before kicking off the macro though – the amuse bouche if you will – as I said last week, I also want to make a more regular feature of sneaking in the news from Property Statto Christopher Watkin, the best provider of real-time residential property stats in the game. 

 

No blockbuster headline this week, because Bank Holidays always chip the stats a little of course – but

 

Net sales up 11.7% on the bank holiday week in 2023

Gross sales up 7.7% on the 2017-19 average (last year 8.2%).


We continue to have more listings than any year in the past 8 – this suggests to me that we have some “backup”, people who were wanting to sell and held off (like the early days of Covid), and we’ve recovered from the “brought forward” purchases that were inspired by the stamp duty holiday that was part of the Covid package of measures.

 

Sales agreed in May stand at £350/ft, April was £344/ft, March + Feb were £339/ft and Jan was £331/ft (going back further, Dec £329/ft, Nov £331/ft, Oct £330/ft) – so anyone who is expecting a downward or even a sideways print this year is going to need something bad to happen from a wobble perspective to have any chance of being correct.

 

The figures are going to bear out a 5% or even better marketplace, that’s where we are although remember 1) election and 2) seasonality. Also remember 1) inflation (particularly wage) and 2) interest rates 1%+ better than they have been in 2023 at certain points are helping. The biggest help is stability, which evaporates as soon as the election is called…..although it appears it could be less worrying because we have so much “backup” in the market, so many listings. 

 

BUYING FROM THE OPEN MARKET SHOULD BE EASIER THAN USUAL. It’s very easy of course if you don’t worry about budget, but it should be easier to get bargains than it has been for quite a while!

 

Onwards. Unlike last week, we had one real chunky report of interest, and then scraps to feast on. That one of interest is the ONS Labour Market Overview – which contains the unemployment figure that everyone looks at, and talks about – and some better metrics that don’t get as much airtime.

 

The first point of order was that, in spite of a flash estimate of 67k more unemployed for March, the final figure was actually 5,000. That’s some miss. The April estimate is 85k more unemployed – but in the face of that sort of revision – I think we can safely say it was a “backwards” month for the Labour market, but not be particularly sure that that sort of estimate is anything to hang our hats on. I wonder, as an aside, how much of that was inspired by the minimum wage hike.

 

The EMployment rate is 74.5%, a favoured metric of mine – 1.7% below where it was before the pandemic, and down 0.6% on the quarter – a significant drop (figures are a bit wobbly at the moment at the ONS, on employment, still suffering from Covid behavioural changes of firms). The economically inactive rate is 22.1% – 1.6% above where it was before the pandemic. Here endeth the lesson. 

 

The growth of earnings – excluding bonus, which I currently prefer as the better metric because Covid-sponsored bonuses were used/have been used frequently, but skew the base figures – is still 6% for the quarter, no change from Dec – Feb’s figure. That led to a real terms increase of 2% when adjusted for CPIH (including housing costs) or when adjusted for CPI, more like 2.5% upwards in real terms.

 

Vacancies are just under 900,000, but still over 100k more than before the pandemic. Drastically different from 1.3m or so, but still – this looks to be evening out. All in all – we knew (from real time reporting, and vacancy data – and also from recruiters saying what a tough Q1 they were having) that this was all coming. Vacancies since the period this is reporting on (Q1 2024) have been pretty steady using the ONS real time data from Adzuna – a touch down and now back up again. Things look close to levelling off and don’t give the appearance of necessarily trending downhill any more, so we will soon snap off this streak of fewer vacancies month-on-month (perhaps next time, because the Feb – Apr quarter will drop January’s figures, which are always lower). 

 

So we know roughly where we are. Wages pressing things upwards still. Next month’s figures are surely a penalty kick to be above 6%, because I calculate around 18% of the workforce to be heavily influenced by or pegged to the minimum wage some way or another, and they moved up 9.8% or more in April. That is obviously well above 6% so it drags things upwards. This isn’t a 2% inflation environment just yet, and wages are indeed proving very sticky. 

 

Productivity is our next port of call on the back of this. A buzz-word for some time. I have a slightly different take to many on the productivity puzzle since 2008. I believe a lot of the figures leading up to the financial crisis were frankly false, there was fraud that was widespread in the property sector, and thus I don’t believe the data has fantastic integrity from 2006-2007. If you rebased a lot of that post 2003 (say) activity you’d have a different take on the productivity puzzle.

Nonetheless the pandemic seriously hurt productivity, of course. Inflation doesn’t help. Sickness also doesn’t help. Minimum wage rises that are seriously impactful ALSO won’t help. Productivity in preliminary estimates for Q1 2024, though, are 1.7% and 1.5% up when looking at output per hour, and output per worker, respectively, and compared to the 2019 average level. Not much of a move, but MUCH better than the figures in the public sector. 

 

To the gilts, then. We got under that magic 4% barrier, as US figures when revised looked a bit better for inflation. Many are still saying inflation is over – for me, the US figures don’t indicate that just yet. Still – growth has faltered and that looks like a VERY good excuse to try a rate cut (to me). The UK doesn’t have that problem or opportunity, depending on how you look at it. When the US yields dropped, so did ours – and we tested that 3.95% barrier again, but again Friday’s trading took us just above 4% at the close (4.015%, frustratingly) – we had some more really boring days where we stayed between 0.05% on the yields, reminiscent of the “old days”. Happiness is a boring bond market (as long as the trend is downwards, slowly – we’d all take it). 

 

We opened at 4.019 which was lower than the close of the week before, did a dance, tested 4.1% after the unemployment figures, and 3.95% after the US figures, before closing almost exactly where we opened. Next time, gadget…..

 

Thursday closed at 3.975% on the 5y gilt and the swaps closed at 3.881% on Thursday. The discount I’ve been referring to for months now is being preserved – there’s more supply of money for the 5 year fixes than there is demand, right now, and if anything, that discount has increased by a couple of basis points. 

 

Just as a small aside, this was a fairly limp week at auction from what I saw. There were post-auction deals to be done – good enough to warrant a mention here. I would love to speculate that the reason was that the rates have recently gone up again, and these newer yields haven’t really fed through into pricing just yet (they have a little, on the high street, but not in the buy to let sector). It’s more than likely a fluke, although this was our best week of trading this year so far, which was nice. Bargains snagged and snapped up for happy buyers!

 

So – just a roundup of the Bank of England “influencers” to go, before I get stuck into my report on the quarterly live briefing. First up – Huw Pill, chief economist. Not an official speech but plenty of press coverage. The most balanced articles on the subject pulled out two critical pieces of language – Summer interest rate cuts described as “not unreasonable” but with “some work still to do”. That’s a good summary, and I wouldn’t disagree with it strongly. I think they are less likely than that makes them sound – but it depends when summer ends, I suppose……:) Mr Pill also referred to a labour market which is still tight – which it is!

 

Then the official speeches – first up Megan Greene, who I make no secret is the member of the MPC that I most identify and agree with. She was keen to point out that there has been labour hoarding going on – a very “UK” phenomenon (she’s from the States) – so we need to be careful not to typecast here – but it makes sense with very low levels of unemployment (who can you get to replace people?) and also wages remaining high in spite of waning inflation. 

 

Sometimes this means the same number being employed, but at fewer hours per head. The Bank sees the equilibrium rate of unemployment, now (the steady state rate) as 4.5%. Ms Greene showed how economic models haven’t worked that well since the pandemic and furlough, because there’s obviously been other forces at play. The Bank also sees wage inflation staying well above average for more than another year at this time. This isn’t chat that gets Central Bankers to cut rates.

 

I think the most power is in sharing Ms Greene’s last two sentences in their entirety:

“I think there remains more uncertainty about how much inflation persistence indeed persists than there is about how our monetary policy stance is weighing on growth. In considering for how long we must retain our restrictive stance before policy should be eased, I think the burden of proof therefore needs to lie in inflation persistence continuing to wane.”

That isn’t incredibly strong and hawkish. Inflation persistence SHOULD continue to wane. It will be slow. However, as pointed out last week, IF you trusted the Bank of England models (and you shouldn’t, at all) then 1.6% inflation at the end of the 3 year forecast is likely low enough for a cut. Depends what you think of what the markets think about the path of interest rates, and there isn’t major disagreement on that subject at the moment. So – she’s certainly not a “never-cutter” at this stage.

 

On to the other speech, from Friday, which was the reason why I thought on Friday morning that bond yields would move upwards a bit – but that wasn’t really the subject of the talk. The hawkiest member of the committee – Catherine Mann – also spoke. She was speaking about UK Business Investment.

 

Investment since the financial crisis has been really poor – would be a fair spoiler alert. Those who know, know that buybacks have been a much more popular way for companies to “invest” in the past 15 years or so. 

 

Investment is sensitive to the interest rate, particularly for firms investing using a hurdle rate. This rate has moved upwards in recent years, simply because the base rate is up so much – the hurdle rate is, remember, the lowest rate that an investment can return to become viable (and all businesses would rather clear the hurdles in style, rather than brush across the top, of course). 

 

She concluded that large firms perform well, mega-caps have lower hurdle rates (but more capital allocation problems, and a lower cost of capital too), and it scared me a bit to learn that 50% of UK investment is undertaken by 0.5% of large multinationals. What a dependency that is!

 

Anyway – enough macro, even with the bonus sides. We need to move on to the Bank briefing. For those who haven’t read or heard me talking about these before – the Bank sends out their regional representatives, to interact with and inform the local business community. They provide a presentation, take questions (in good humour) and are there to spread the word as well as take the temperature.

 

Our West Midlands regional rep is likely sick of the sight of me by now. I’m a guaranteed question, and as time goes on, I’m at least two questions – one in front of the room, and one where I’d rather get an offline opinion because the rep can speak more freely. These days I also have to quell the urge to explain a concept to one of the other questioners, who either seem to have an agenda, a strong feeling, or misunderstand one of the chief points of the presentation. This time out wasn’t much different. Anyway……

 

I went through the executive summary of the report last week, if you didn’t catch it. This concept of bringing rates down “soonish”, when it is “right to do so”, isn’t a fat lot of help, let’s face it. The Bank has also, in case you missed it, taken a bit of a pasting because their forecasts have been rubbish over the past few years.

 

I often refer back to inflation, and when I first started talking about it (February 2021) in this cycle. It was late Feb (don’t worry, after I started) when Andy Haldane, who was the chief economist at the time, made a speech about just how wide the inflation path might be. I like Haldane a lot, and he is a very sensible and pragmatic economist – but he is but one person, who could not (when he was in that post) speak particularly freely. He did, in that speech, say this:

“Thereafter, the MPC foresees UK inflation remaining around its target level. The risks around this projection are, in the MPC’s judgement, large but balanced. That these risks are large is fully justified by the high degrees of uncertainty that exist around the forces driving inflation in future, as I have discussed here. But given likely trends in these factors, my judgement is that the risks to inflation in the UK are skewed to the upside, rather than being balanced. Certainly, there are good grounds for believing future inflation may behave very differently than in the past. My judgement is that we might see a sharper and more sustained rise in UK inflation than expected, potentially overshooting its target for a more sustained period, as resurgent demand bumps up against constrained supply. “

 

That’s nearly as strong as I was about the whole thing at the time, bearing in mind he was constrained enough not to be able to say “this is what everyone thinks, on average, as a committee – that risks are balanced – but I don’t agree, I think we are going to see higher inflation for longer”. He was right, of course. He was keen to discuss the probability of rates going up, even though it was ALSO February 2021 when the Bank of England asked commercial banks to take a look at what would happen if the base rate had to be lowered to zero or below.

 

Haldane was on the excellent “The Rest is Money” podcast with Robert Peston for a couple of episodes recently and COULD speak more freely, and they are worth a listen. One of his (legitimate) concerns was the spending of savings from the pandemic when unlocking finally did come. There was a bit of that, although at this point that consumption boom has been and gone and spending is quite a bit lower than even one year ago. Particularly in the 55+ age bracket, who are discovering once again that saving can actually pay, even if it only pays 5% or so if you shop around – that’s 5% compared to 1% (maybe) two or three years ago.

 

He also chats about how bad the Bank has been at forecasting. This was featured in last week’ supplement because they were even bad at predicting GDP in the now. Indeed, this was the subject of my question to the Bank’s rep in front of the room – “given that GDP, in the Bank’s eyes, was forecast to be 0.2% in Q2 2024, and we are halfway through that quarter – and we had a 0.6% print when the Bank expected 0.4%, and NIESR (the National Institute of Economic and Social Research) are predicting 0.6% for Q2 – does that (significant) change make it more or less likely that we cut rates in the near future?”

 

It’s a funny question, in a way, because I know the answer. The Bank says that they expect GDP growth of 0.5% over the next 12 months. That’s very obviously wrong at this stage as an expectation, because if we are looking at 0.6% this quarter, then unless there are reasons for another technical recession (which there aren’t), how can 0.5% be in any way accurate? It’s patently wrong. The rep confirmed that, indeed, if we have 0.6% growth in Q2 or anything like it, the case for cutting rates is significantly weaker. However, he did point out that (as I highlighted last week) the path for inflation, expected, if the base rate moves as the market expects (2 cuts within the next 12 months, 6 cuts within the next 3 years – current market expectations) then the Bank’s forecast is inflation at 1.6% in 3 years time. 

 

That implies there is room for a cut, but it doesn’t bake in the fact that we are growing at 2.5% annualised at the moment. That will surprise everyone (apart from Sunak and Hunt, who will claim this bit of course). I think it is even simpler than that – the economy has actually done really well, apart from inflation. Growth is pretty much the only metric that has inflation baked into it by definition – none of the others do. We did incredibly well between Q4 2022 and Q4 2023 not to have a massively shrinking economy, because the inflation rate over that time period was over 7% on average – so the figures needed to grow by 7% to be adjusted downwards by 7.2% and show a “shrinkage” of 0.2%.

 

That’s also a bit of a false dawn, because the population grew, and so per head, performance was worse than that. But not terribly worse, given the inflation constraint. Regular readers and listeners know that I prefer per household to per head for our purposes as property investors, because heads don’t rent property – households do. 

 

So – the Bank’s models aren’t just rubbish over 3 years, they are rubbish right now – in the near future. This growth spurt has taken them by surprise. As and when it does start to wane (and it does – the path is never smooth) then I will be reporting on it in real time, but as I write this, there are no clear signs of when a wobble is coming, here. 

 

My offline question for the quarter – whilst on the subject – was “Why don’t the government, in the UK as well as the US, consider raising the inflation target?” – I couched this with the research I’d done on pandemics, and that inflation tended to be a problem for decades afterwards historically. “3% makes much more sense than 2% at the moment as a target” – my argument.

 

He had a couple of interesting points on that one. Firstly – of course – this is a government decision rather than a Bank of England one, but he accepted that the influence of the Bank at government level would be a key factor. Secondly, he pointed out that this is also a credibility issue. You’d have to be sure before you changed the target, because if you then changed it back down again relatively quickly, you’d start international markets wondering if you knew what you were doing (and we don’t want that, because we don’t want another lettucegate).

 

That makes sense. On reflection, as well, there would have to be a reaction – how would bond investors feel? Well, rate expectations would actually be cut – almost certainly. It would save the government (and thus the people) tens of billions – if not hundreds of billions – because lending would become cheaper. Why? Because the markets would know that if inflation is going to be not only allowed, but encouraged, to be 3% or so, that rates will be lower, because inflation can be higher than the target that has been set for the past 25 years.

 

I see a much stronger argument for doing this than against it. I’d be even stronger about this than stopping our stupid Quantitative Tightening programme which has a £45bn+ bill attached to it, which I am furious about – because this would, I think, save us more than £45bn. I also think that the headlines about this would be tiny, because only 100 people or so would truly understand it – just like LDI, LLDI, CDOs, MBSs, and all of those lovely acronyms that only get explained to us after the event. Bond traders would have a field day, and equilibrium would be disturbed in a way that would favour the people over the hedge funds. Yum.

 

As you can probably tell, I’d be a nightmare in policy departments, because I’m sure I’ve missed something here, but I’m convinced that I’m right. I’m also trying to do the best thing for the country, not for myself – which I’m sure is the common thread across all policy departments, naturally. Mostly. Sometimes. OK there are sometimes conflicts of interest…..

 

Anyway, those were my questions. One other question asked was about inflation – the rep tried to explain that we “know” that inflation is coming down to 2% in the print that will be released next week. I disagree that it will hit 2, but we will see. My latest dart was at 2.4%, because the economy is hotter than expected, but this isn’t “hot growth” at the moment, because it is in the business sector side rather than the consumption side (true). We also (in theory) have major disturbance to GDP baked into the figures from 2025 onwards because of the austerity that has been already “decided” by Jeremy Hunt (and it will be hard for Labour to depart from it) – because, remember, GDP is Consumption plus Investment (businesses) plus Government Spending plus Net Exports/Imports.

 

Investment looks pretty promising now – the money and credit report for March was pretty positive with the highest net borrowing for a couple of years by businesses. That money, as I said at the time, goes into investments that stack up even at today’s interest rate. That all fed into the growth figures, of course. Hence growth looks good in the near term. 

 

The questioner was asking why, if we were going to hit 2%, we couldn’t cut rates. The rep was patient and explained that inflation is forecast to go back up – and that’s a guarantee at the moment, because the energy prices aren’t coming down any more. The last sweep on the price cap forecasting by Cornwall Insight that’s in the public domain (they tend to be the best at predicting it) is now a couple of months old, and system prices are a few pence up on then – so, if we do see a reduction in July on the prices, it looks like it will be (as at today) less of a reduction than they forecast back at the end of March.

 

Still, the model – already lambasted for its lack of accuracy, does have inflation at 1.6% at the end of the period – which is of course below target. It has the wrong growth path calculated into it – for clarity that’s 0.5% over the next 12 months, then 1%, then 1.25%. You can tell they are guessing a fair bit, because it is to the nearest 0.25% – and they have to, of course, because there are so many factors at play. However, I see no evidence of the currently best performing economy in the G7 by growth, nor the tightening in Government spending baked into those figures. I am expecting much better for 2024 now – under 1.5% at this point would be a disappointment, but challenges after the election for the next administration.

 

So what else came from the presentation that I’d like you to know about? Services inflation was mentioned to a reasonable degree, as was my point that wage inflation at 6% (expected now by businesses to be at 5.5% on average throughout 2024, up from 5% the last time the business expectation figures were shared) – neither of these are a 2% inflation environment, as was mentioned. Neither are trending downwards particularly quickly either – however, the point that wages are still “catching up” – which is fair – as goods prices moved much more quickly – and therefore these aren’t necessarily anywhere near as inflationary as they would otherwise be – is one that was well made, and one that I accept. It’s the overall stickiness of this – there’s no way the employees as a whole put their hands up one day and say “actually, we’ve had enough now, no need for these pay rises” – these rises benchmark each other on an ongoing basis, so whilst that’s “economically true” – I’d rather focus on what the likely behaviour will be in the real world.

The current minimum wage “forecast” for 2024/25 is 3.9% as a midpoint, but up to 6.5%, with a low of 1.8%. I can tell you now that the data input into that forecast was wrong, and underestimated the current level of pay rises – the number comes in September, but next year will look more like £12 or similar – Labour may also push minimum wage up even more and make it yet closer to the median wage (that’s what’s been done quite aggressively between 2020 and 2024 – the current target is two-thirds, but the next step might be to get it to 70%, then 75%, then 80% – we will see). 

 

Services inflation is now 49% of CPI (up from 47%) and was 6% at the last print. That on its own still provides us with a starting point for CPI at 3%. Core inflation wasn’t even mentioned at the meeting this week, but will still be over 3% in next week’s print – and, as I keep saying, April’s wage figures aren’t out yet but there’s a spike coming that will last for April, May and June’s figures because they are reported 3-monthly, because of the minimum wage increase.

 

In the medium term, there was an overall tweak to the figures which definitely pricked up my property radar. The ONS have revised population estimates, and at this time, the expectation is that the population aged 16+ increases by around 1% per year, rather than 0.75% per year. What’s the quantum of that difference? Around 170,000 people per year. Where’s that coming from? Migration. What does that mean? Around 150,000 or more “new renters” per year. Huge numbers.

 

These are the relevant opening paragraphs from the ONS report – we will get another update in the final quarter of this year, but suffice to say – those who watch migration numbers far more closely than I are convinced that the ONS projection of 315k net migrants per year is too low, and in fact 400k+ is nailed on.

Over the 15 years between mid-2021 and mid-2036, the UK population is projected to grow by 6.6 million people (9.9%) from an estimated 67.0 million to 73.7 million; this includes 541,000 more births than deaths, and net international migration of 6.1 million people.

 

The UK population is projected to reach 70 million by mid-2026; this growth is faster than in the 2020-based projections released in January 2023 with the projected increase mainly resulting from international migration. 

 

The population projections for the UK are based on an assumption of long-term net international migration of 315,000 per year from year ending mid-2028 onwards; this is based on expert views and the latest data covering the last 10 years; note migration assumptions do not directly account for recent and future policy or economic changes and there is always some uncertainty in estimates of migration, meaning actual levels of future migration and resulting population may be higher or lower than those assumed in these projections.”

 

Having looked at the trends myself, and made some Covid allowances and also some allowances for more restrictive policy, I’d tend to agree that 400k is more likely that 315k on average as we currently sit, and I’d think 350k+ average is nailed on, regardless of who wins the election (I’m counting out Reform, there, of course). 

 

As an aside – if you were ever thinking about getting into care, by the way:

“There will be an increasing number of older people; over the next 15 years the size of the UK population aged 85 years and over is projected to increase from 1.6 million (2.5% of the total population) to 2.6 million (3.5%).”

 

The future supply of tenants looks very secure indeed, folks. We will look back on pre-pandemic as if there were no issues at all in the UK housing market, mark my words – that will be wrong, of course, but this shift over the coming 10-15 years will be like nothing we’ve ever seen before.

 

Back to the report. The Bank has defended its poor forecasting record by pointing out how much external data they use – and it is that data that’s been wrong. That’s backfired a bit, and I did say some time back that the least surprising thing ever would be Ben Bernanke, US Central Banking legend (of sorts), recommending we do things a little more like the US. The best manifestation of that would be a “dot plot” – where, instead of hiding behind what the market says about the interest rate, the Bank’s committee members all plot on a very simple chart where THEY think the interest rate will be in 3 months, 6 months, 12 months, 2 years, longer term – etc.

 

I agree. They absolutely should do this because for a long time during this hiking cycle we were constantly told “the markets have got it wrong” – and, at points, they did. Especially when they saw rates above 6% for base around the mini-budget time. BUT – if the markets are wrong, let’s see how far wrong the Bank thinks they are? Let’s have more room for the Bank to overrule them, AND the models that have performed so badly in the past few years?

 

One other aside that I need to shoe-horn in here – in simple terms. Wage, benefits, and other income rises at the moment are being saved. They are NOT being consumed. This isn’t very inflationary at all – indeed it is somewhat disinflationary. WHY? Well, worries about geopolitical concerns. Worries about changes of government (the 7% of households with children that attend private schools – do you think they are consuming “devil may care” at the moment or do you think they are building warchests to pay those fees? And that’s one very specific example). More attractive savings rates as I already said. The savings ratio is double what it was before the pandemic, whatever the reason, and trending upwards. 

 

That’s good for inflation, but bad for the growth of companies – they pay out more, but it doesn’t get spent on their products or services, as a simple analogy. However, as I’ve said – the vacancy “shedding” that’s been there for a couple of years now looks nearly over to me based on the real time figures.

 

There’s no guarantee in a lot of these trends, of course. If there were, forecasting would be easy. 

 

There were so many charts I could have used from the report this week, but this one really caught my eye at the presentation. What’s missing from it is the actual path of inflation – which is a real shame – but it tells you what you might already know. Households were actually ahead of the game in this inflation wave, and their expectations are better and more accurate for CPI than anyone else’s. I can let the businesses off – they don’t face CPI, but production costs and wage costs upwards – and so they haven’t done a terrible job either. And look at the chart to see how far above the other actors they are.

 

But focus on one conclusion particularly. In the medium term, households expect inflation to be running at close to 3.5%. Businesses look more like 2.7%. It’s almost as if they all agree with me that moving to a 3% inflation target would be a good thing – and when they found out that that would mean interest rates would go DOWN – oh wow, then they’d be on board, I’m sure! Again not discussed is that households expectations have been around 3% for some time – the inflation rate in the 2010-2019 period? 2.7% on average. Not bad, households, not bad. 

 

So – what can we conclude and how does all that help us? Well, cuts are more expected than they are realistic, in my view – we will be waiting a while for anyone to do anything sensible such as change the inflation target, so get used to the swap rates around 4% or so – although I do still expect these to fall back by another 0.25 – 0.5% as the year goes on – might be waiting till Q4 for that though.

 

Rental demand is going to continue to skyrocket, and expect rent increases at or above wage increases for some years to come. The future on that side looks incredibly dim for tenants, and strengthens the investment case quite a lot (remember, this isn’t the only fruit – what will compliance look like, what will changes in tenants’ rights look like – there will still be plenty to put people off, Labour aren’t going to be kinder than the Tories to landlords, that would be so forward-thinking as to be impossible). The housing market is going to get more and more broken.


Wages are going to stay sticky for some time, and the current gentle upward trend in the housing market will continue at least until the election is announced – and the market might just be a little more robust than usual. But everyone hates uncertainty. That bit will never change.

 

Inflation, you are much smarter to expect around 3% than around 2% in the near future, in my view – next week’s release notwithstanding. But don’t expect a cut just because we “hit target” (even if we are not going to) – expect the dead cat bounce, which might take a quarter or so to kick in, but could be quite fast. 

 

Pending shocks, the economy is doing OK and on a personal and business level, I think it is a great time to be investing. Growing markets, pathetic supply of housing, lots of opportunity – let’s see what happens to the savings versus consumption angle, but the market feels ripe for purchasing right now in the face of the fact that prices are – in spite of many predictions – simply going up again. Remember – almost everyone got it wrong because they didn’t understand inflation. It’s still with us – and will be for at least another couple of years yet – but the effect might not be massive. 

 

Regardless, I’ll be there by your side, with humongous reports in great levels of detail, trying to cover all angles, in my army of one. 

 

Well done as always for getting to the end – remember the Super Early Bird tickets for the next Property Business Workshop on Thursday 4th July – http://bit.ly/pbwthree 


There’s only one way to deal with all of this continual noise, of course – Keep Calm, ALWAYS read or listen to the Supplement, and Carry On!