Where's this deflation then?
A few months ago there was panic as dire predictions of the CPI falling into negative territory abounded and the spectre of a potential deflationary spiral stalked the land.
I was a bit sceptical of this given the fact that the Bank of England was effectively printing money through their Quantitative Easing programme (OK, they don't actually print money, they just move a few bits around inside a computer but it amounts to the same thing). QE is naturally inflationary so any deflationary pressure which was bound to kick in during a recession was always going to be mitigated to some extent by this. Also, the fiscal stimulus measures that the government took, despite that fact that I thought they were the wrong ones, were also always going to have some inflationary effect. Finally, the huge cuts in interest rates have left lots of lucky homeowners who are on tracker rates (including Mr Reckons here) with money in their pocket that they had not been hitherto expecting.
Given these factors which seemed obvious to a non-economist layman like myself, I must confess to be surprised at the general surprise that deflation has not kicked in. The CPI is at 1.8% for the second month running and it is looking like it might have reached a local minimum as my old maths teacher would have said. I would not be surprised to see it start to rise in the coming months.
Ah, I hear you say (see, I listen quite hard), but what about RPI which is currently at -1.4%. To which I say, you cannot have it both ways. The government has spent years trying to get us to accept CPI as the headline rate (because it excludes mortgage interest which is politically convenient for them) and the BoE is compelled to make its interest rate decisions based on this measure. So why should I consider RPI when considering the rate of inflation when the BoE is not expected to? Anyway I am sure RPI will start to head north soon too. It's only so low because of the massive cuts in interest rates which distort things given how reliant on the housing market our economy is.
All of which economic cogitiation leads to me to the most important question. Should I exercise my option to go for a fixed rate mortgage at 4.09% for 3 years (I have reserved this potential rate for a small fee and have the option to exercise it until December but am yet to fill in the paperwork and submit it) ? I am currently on a tracker at 1.26% above base rate (so 1.76% at the moment) but of course as the CPI starts to rise the BoE will start to raise interest rates.
I discussed this with an economist a couple of months ago and she suggested I wait and see. I think I have waited and seen enough though. Even if I am wrong and the CPI starts to fall again, I am certain that in another year it will be rising and this option would protect me from the effects of subsequent inflation (which could be severe if the BoE do not time the cessation of the QE programme correctly) until the end of 2012.
What do you think I should do, stick or twist?
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8 comments:
Perhaps you should consider RPI because it is based on a more accurate assumption of what you actually buy? (alternatively CPI might be better for you - its just a suggestion)
Why make your decision while
(i) there's still a sizeable gap between current rates and your 4.09% option and
(ii) you have several months to watch for signs that lending rates will increase rapidly over the next 3 years?
Because it will take a while to process the paperwork and get everything sorted so if I don't get cracking by say mid-September I could miss out, and (assuming interest rates go up over the next year or two) it is a very good deal. It is also an offset which I wanted too and they are hard to find.
Can I use this opportunity to say that I took a mortgage out in March this year at 0.7% above base.
Quite literally, the only good thing that's come out of this recession for me.
At the risk of being hounded by NuLab media types, who qualified in Fuck All from the University of Maesteg and therefore can now tell everyone how to run their lives, I would suggest doing the sums. (sorry!)
I am about to borrow 200K for a mortgage, which at the moment one can get at a 2.39% variable, 4.34% fixed (3yr) or 4.99% (fixed, 5yr). I calculate that interest rates would need to increase by 0.5% per quarter from now, for three years, to make the interest payments on the variable and 3yr fixed to be roughly equal.
Furious, how can you possibly now use the title "contantly furious"? Surely "constantly smug" might be better? ;)
So the tracker mortgage boys are happy with their low payments, that's great.
What they haven't considered is the fact that their properties value is probably plunging more per month than they are saving. LOL.
If you don't mind the fix, surely the offset is the reason to stick. If there wasn't an offset it would be difficult to make the arguement for such a short term fix.
Deflation isn't here precisely because of BoE action. The idea is to have a little inflation, and this policy seems to be working, with CPI at 1.8% as you say. If inflation was lower (say 0.5%), then this is bad (though not as bad as proper deflation). Why? Remember that the inflation figures are averages, so that while CPI is 1.8%, different types of items will be inflating at different rates. If CPI is 0.5%, then there's a very real chance of whole swaths of the economy deflating, with the rest inflating. Obviously it's best to avoid that situation.
Oh, and don't forget RPIX inflation. The media always give CPI and RPI, but never RPIX for some reason.
There's some good info on the difference somewhere on I think the BoE website (if not, the ONS website).
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