The Garrulous Jay – In Case Of Emergency

So here we are again contemplating a potential inflationary shock. As a result of the attacks on Iran prices are rising and Central Banks are adopting the ‘brace position’. 

Yesterday the Bank of England’s MPC members voted unanimously to keep interest rates on hold: a far cry from expectations before the outbreak of hostilities in February.

This is hardly surprising when one looks at what’s happened to prices since then.

Brent Crude has risen 50% from around $72 per barrel to $108 per barrel. The standard Dutch TTF natural gas price has roughly doubled from €32 to just over €60.

Urea – a key component of fertiliser – has risen in price from $482 per tonne to $720 per tonne, while wheat futures have started to reflect this with increases of 5-10%.

This has inevitably led to calls for the government to take action to support UK consumers and protect them from rising prices.

So far the response has been the announcement of £52.4 million of targeted financial support for low-income households impacted by the increases in heating oil and LPG, which are not covered by Ofgem’s Energy Price Cap.

If the conflict is prolonged or escalates inflationary pressures will become more generalised leading to an increasing clamour for a larger and wider package of support.

Forget about BOMAD (Bank of Mum and Dad), it is as if we have become increasingly dependent on BOHAB: Bank of Help and Bailout.

One might think that this started with the COVID support packages, which cost around £311-407 billion in direct spending and tax revenue forgone. This was followed up by the £75-80 billion spent in providing protection against rising energy costs when Russia invaded Ukraine.

But the trend was arguably set as far back as 2008 when the government bailed out the banks to the tune of £137 billion.

My concern is that these actions encourage individual financial imprudence. I also wonder if people forget who ultimately picks up the tab for this political largesse.

In the 1990s the UK consumer debt-to-income ratio stood at around 85%, compared to more than 115% today. Conversely, 39% of UK adults have savings of £1,000 or less, with 16% estimated to have no savings at all.

At the same time the UK National Debt per capita has risen roughly fourfold over the last 20 years from £10,000 to £40,000, driving up the interest burden to over £100 billion a year.

It took a second Budget for the Chancellor to realise it made sense for her to build meaningful ‘headroom’ into her calculations. But by doing so, and by announcing the Treasury had “found the money” for the latest support package, she may simply be compounding the long-term problem of expectation mismanagement started in 2008.

As JFK famously said: “Ask not what your country can do for you—ask what you can do for your country”.

The first thing we should all do when making financial plans is set aside funds for emergencies.