Posted by on March 26, 2017 12:48 pm
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Categories: Bank of England Business Consumer price index CPI debt Deflation Economy Economy of the United Kingdom European Central Bank federal reserve Finance Government debt Household debt Inflation Market Share Meltdown money office of Budget Responsibility Price indices Retail Price Retail price index Twitter United Kingdom US Federal Reserve


Last week, the Office for National Statistics released the inflation results for the British economy. Even though most analysts weren’t expecting any huge differences, the numbers (updated until February) paint a completely different picture. In February, the inflation rate increased rather sharply. On a month-on-month basis, the CPI increased by 0.7% (whereas January was a month with deflation). The current YoY inflation rate based on the CPI is 2.3%.

‘No big deal’, you might think. But in this case it is.

Just one year ago, in February 2016, the annual inflation rate was just 0.3%. This means the inflation rate has almost EIGHTFOLDED in the past year, with a very clear acceleration since October.

Inflation UK 3

Source: RBC, ONS Data

Could it be worse?

Yes, definitely.

Not only does the ONS release an update on the CPI numbers, it also releases a RPI update. That’s the Retail Price Index, which basically measures the cost increase of goods and services. And in February, this index revealed some shocking numbers.

In just one month, the retail prices of a basket of normal goods and services became 1.1% more expensive. When compared to the results of the previous year, the retail inflation rate is in excess of 3%. That’s right, life has become more than 3% more expensive for the average UK citizen!

And this proves how fast and quiet inflation can come back in our lives. Forget about deflation, the only way is up. That’s why the Federal Reserve is hiking the interest rates, and it’s why the ECB has been hinting at a higher benchmark rate as well.

But this might actually cause a huge problem in Great Britain. Not only is the inflation increasing – and will the Bank of England undoubtedly have to increase its interest rates again, the total debt in the United Kingdom is increasing. Fast.

In fact, several politicians and officials have been ringing the alarm bell, as the savings ratio in the United Kingdom hasn’t been this low since the Global Financial Crisis, and in its latest update, the Office of Budget Responsibility (OBR) has confirmed the savings ratio in the UK has now turned negative.

Inflation UK 1

Source: Bank of England

Indeed, the British citizens are spending more than they are earning. This means it won’t be just the government debt level which will increase, but the total amount of household debt will increase as well. The average British household has almost 13,000 GBP in debt (on top of the mortgage) and the Office for National Statistics confirmed the total unsecured debt has increased to almost 350 billion pounds.

This also means the ratio of unsecured debt as a percentage of the average household income has increased to almost 30%, which is once again the highest ratio since the global financial crisis.

Even if you would exclude student debt (although there’s no good reason to do so), the total amount of unsecured debt would be close to 200B GBP, of which 1/3rd is credit card debt. Meanwhile, the total market share of ultra-long mortgages (30 years or longer) is increasing as well.

Inflation UK 2

Source: Bank of England

That’s a very worrisome situation; the gross and net debt position of the households is increasing whilst the savings ratio continues to drop. And that’s a deathly combination which can’t end well.

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