When is inflation not inflation?

It was pleasing to see UK inflation back to the target level of 2% this week, completing it’s round-trip over the last couple of years that took it up to 11% at the peak.

But will that finally move the Bank of England?

Not this month is the first answer and when I saw this tweet below, it gives a great explanation on why – but also why it is so backwards-looking.

The chart highlights the widest gap between UK Goods and Services sector CPI on record. In short, the cost of things are actually going DOWN (see the blue line below 0), yet the cost of actually DOING things continues to go up at a reasonable pace.

Viraj highlights this in terms of leading and lagging indicators. Cost of goods i.e. stuff are a leading indicator while the costs of services are a lagging indicator. I would also put wages in this bucket, which is why the near-maniacal focus on wages by the Bank of England so infuriates me.?

Like I’ve said previously, they will cut rates soon enough, but not before continuing to inflict pain upon mortgage-holders and the real economy. Even their own data is telling them this.

But what do I know? I just have a mortgage.

Two simple words that provide a great example of why services inflation stays higher:

Taylor Swift.

She is almost an economy in herself.

I wonder how much this has to do with a post-lockdown world, with the value of experiences and services now prized more highly than goods and therefore people are willing to pay up for them?

I’m lucky enough (or some would argue unlucky) to be the wrong age, and also have the wrong age children, so I haven’t had to pay for the cost of tickets, hotels and other paraphernalia that seems to come along with going to a Ms Swift concert. But frankly, it does seem more fun than buying a bigger TV every few years.

An extension to this discussion which I know is highly relevant to many of you.

Do private school fees count as an “experience” in this way?

I appreciate this will be a contentious and potentially very difficult and worrying issue for many readers of this newsletter. I will also do my best not to take sides on this.

Some of you may find the IFS report – which Labour have referred to often – interesting with it’s findings. I attach it here.

Clearly higher fees will push a number of people out of being able to afford private schools. It will also stop a number of people considering private schools.

I’m not sure if that is the purpose of this tax, but it’s just basic economics which the IFS agree:?

“Our best judgement is that it would be reasonable to assume that an effective VAT rate of 15% would lead to a 3–7% reduction in private school attendance.“

That reduction number does seem quite low, but when thought of in the context of being happy to pay for the experience and services that is going to private school, that is consistent. I was very lucky and proud to attend a private boys school in Melbourne, and absolutely it was an “experience” and not just learning to read and write, so I totally get that.

The other fascinating line is this report is as follows:

Finally, it is possible that the state sector could easily accommodate extra pupils given that overall pupil numbers across England are due to decline by at least 100,000 per year on average up to 2030 – i.e. a total drop of more than 700,000, which is bigger than the total number of children attending private schools.

Huh? Is there some weird drop in births from 13-18 years ago? I want to do some more digging on this and will come back with more over the next few weeks.

Adam Walkom

**My personal views only. Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest.**