Published by Kauders Portfolio Management, Authorised and regulated by the Financial Services Authority
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The temptation to hype up a minor change in statistics is sometimes too good to resist. The report that inflation is set to take off, interest rates rise, and so on is pure hype. Putting base rates up will merely bring the pack of cards i.e. consumer debt, tumbling down. The Bank of England cannot afford to create such chaos and this is why base rates cannot go up for any length of time.
The headline Retail Prices Index is an annualised rate of change based on the difference between two points in time, ignoring all special offers you continually find in the high street. How many people refuse special offers and pay the list price whenever they can? You can see how ridiculous the hype is when you think about it carefully.
Back in 1990 our clients were buying fixed yields of over 12% because we alone saw that inflation (then 10%) had to come crashing down.
Back in 1994, the papers were full of the "inflation will go up" story. The only inflation was in the elaborate arguments presented. There was no inflation.
A little later a major forecasting body announced that interest rates had to rise. In 1997, interest rates also came crashing down.
For a deeper understanding of "why the news is too late" we recommend reading The learner's guide to capital markets. Hype can actually offer a slightly better buying opportunity for those who understand the need to anticipate.
The real issue is still deflation. Falling prices could well occur - indeed, the current hype about inflation makes us think that falling prices are even more likely within a few years.
Investors need to understand how to turn news stories to advantage.
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© Kauders Portfolio Management 2002