Disinflation is coming to the UK

Oops.

UK housing prices did a naughty this morning.

      THE FIRST NEGATIVE PRINT IN 11 YEARS

The Bank of England has just called up Hewlett Packard for the world's largest printer ink order I reckon, because this simply will not do; this is NOT very British.

No, but seriously, we're short EURGBP right now for a reason.

As I said on Friday, I reckon the UK come August is going to start having one of the fastest disinflationary reversions possible...

Sort of similar to what Europe is currently going through (which is why we're short EURGBP)...

If you missed that post, check it out here 👇

What's funny to me about the discussions in media around UK inflation is the absolute lack of belief that inflation can at all decrease.

Now I know Marina Purkiss is a little bit dim and childish, but many still believe this line of thinking...

If you were to ask Marina what german food inflaiton is, she probably wouldn't know.

Or she'd say something like, 'yeah, but Germany can resolve its food inflation easily,' or something even more reductive and stupid.

There is absolutely no doubt that UK food inflation is high, as it is across the world...

But what is the key input to this?

That same thing I was battering on about on Friday...

Energy!

One of the largest components of fertiliser is Nat Gas for instance...

And if we look at UK fertiliser prices, we can see the top was roughly in at the same time as the Nat Gas top back in August last year...

The same hedging issues occur in the fertiliser market...

From this 2017 article on fertiliser hedging...

I would argue the pandemic and Ukraine war has sent this timeframe out slightly to a year plus...

But this still coincides with the view that UK inflation is likely to fall in August onwards, especially since the UK regulator has given some insight into how they expect price to start behaving by removing the energy price cap from July...

Here's what I said back in April whilst high on Oxycodone for an infected leg...

And of course, I was right, since being high on Oxycodone certainly gives you the righteousness you feel you deserve...

OFGEM, the UK regulator, has indeed lowered the price cap from £2500 to £2074 from July...

But the way the media phrase things sort of shows they don't understand disinflationary forces...

'A modest drop' would likely be 3-5%, not nearly 20%.

That is a big reduction which in my view will start to eat into the inflationary force from August through to October as the price cap is further dragged lower.

A Global Phenomenon

But Nat Gas issues aren't UK specific of course; I mean, one of the largest reasons that Nat Gas price is high and German industry is in the doldrums is due to Russian supply being cut off...

So we can take this isolated micro view and translate it more holistically to...

THE COST OF ONE OF THE KEY ENERGY INPUTS IS FALLING GLOBALLY.

Naturally this makes exports and imports cheaper, leading to the downward suppression on inflation.

From a UK perspective, the first chart in this piece is important though; the UK's wealth IS property: in 2020, UK land was valued at £6.3 TRILLION (fuck me).

So the fact property values have turned negative is important; land makes up 60-70% of the value of the 'property', the proof of which would be if you move a Mayfair mansion to Carlisle, you're probably paying £45 and a packet of Haribo rather than £50mm (sorry, I'm being a London snob towards Carlisle. Some of my best friends are Carlisleians).

That weird mechanism the wealth effect is something which feeds into this whole story as well - if the number one destination for wealth security is facing decling prices, then we can probably say we have maxed out on our economic luck for a little while.

It could be too early to say, but I feel like you don't get negative blips like this in the UK property market often...

So just to reinforce how we action this, my view is to stay short EURGBP until the end of August where we are playing the weakening inflationary backdrop in Europe off against the stickier backdrop in the UK.

Come the end of August, I think we reassess and get a feel of what we're dealing with, the extent of which I hope is actually pretty profound, because I'm throwing £70 a week in petrol into my car and it hurts bad.

Currently short 0.8630 and 0.8590, looking for 0.83ish (maybe this is a stretch with how flat EURGBP has traded + lack of summer volatility).