By Filipe R. Costa
According to the latest data from the Bank of England, British households have been pulling money out of their savings accounts at the fastest rate since records began in 1970. The Credit Crunch ushered in a prolonged recession in Britain, tearing away at consumer spending power. To compound this problem, real wages have been decreasing, as inflation has been rising faster than pay has been going up.
In spite of this, what has been a bit of a surprise during the third quarter has been the significant increase in consumer spending. In the past, one would have attributed this to increased borrowing, but the data points to a new worrying trend. British people are being forced to dismantle their savings accounts, to cover the increased cost of day to day living.
During the first ten months of 2013, the amount of cash in time deposits and ISAs fell by 4.7%. At the same time, readily available cash held personally or in current accounts rose 11.2%. This represents a major shift from saving to consumption and suggests an increase in systemic risk. In a world that is meant to be deleveraging, a decrease in the savings rate is not to be welcomed.
On average, UK households converted £900 of savings into instant access cash. This totals roughly £23billion and reflects two current realities;
Both points above call into question the effectiveness of quantitative easing. The intentional effort by policy makers to push people up the risk curve has serious long term implications. By keeping interest rates low, it has been the goal of central bankers to force consumers to spend and investors to buy riskier asset classes. The second aspect of this plan has seen an unnatural increase in the money supply and deliberate attempt to stoke inflation, further destroying genuine wealth.
Unfortunately, when it comes to measuring inflation, it is very difficult to get a handle on the true state of affairs. The official statistics are little more than entertaining figures, which have been tweaked and manipulated over the years beyond any semblance of being a reliable data set. Governments around the world inflate price, in the hope voters won’t notice the mother of all stealth taxes quietly stealing from them every day.
Even though it does not reference Britain, the SGS-Alternate CPI indicator is a good tool for measuring true inflation. The following chart reveals the official reported CPI compared to an alternate measure, based on the official methodology dating back to before 1990:
As you can see, under the old calculation CPI would be at least 2% above the currently reported figures. Consider the impact this would have over a 20 year period. After a small tweak, prices would be 50% higher than officially recognised. Now, there is some food for thought…