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Should We Expect Inflation or Deflation in 2021?

Inflation is the one subject investors never seem to agree on. Peter Hemple reports

There are landlords in the UK that have never borrowed money when the Bank of England (BoE) base rate has been as “high” as 1.0%. As a result of this very limited time span as a property investor, they are unlikely to lose much sleep over the threat of inflation. The longer a landlord has been invested in property however, the more they will be aware just how inflation, and a rising interest rate, can impact, or even devastate, a property portfolio.

If you ask a landlord “what has been the average BoE base rate over the past 40 years?” The answer will give you a strong indication of how old they are. Rounded to the nearest tenth of one percent, the answer is actually 6.10%. But the base rate in the UK has been on a downwards trajectory every decade since the 1980s (average base rate of 11.8%), into the 1990s (7.8%), to the 2000s (4.3%) and of course the 2010s (0.50%).

The question now is whether the 2020s will bring more of the same (hovering at just above 0% as we have seen in Japan for the past 20 years), a continued downward move into negative interest rates and negative mortgage rates (as there currently are in Denmark, which has a base rate of -0.6%, and in Switzerland at -0.75%), or whether we see a return of “normal” inflation and a base rate of around 4% (which is currently the case in other large, albeit less developed, countries like China, India, Russia and Mexico).

There are many factors that affect the inflation rate but we are now entering an extraordinary winter period that includes: fighting a second wave of the worst pandemic in generations, officially leaving the European Union after almost 50 years and unprecedented monetary stimulus by governments around the world.

Also, while the link between the price of oil and inflation is not as strong as it used to be, at the time of writing, the cost of a barrel of Brent Crude oil (priced in sterling, which ultimately is all that matters with regards to UK inflation) was £30.21. This compares to £51.29 as a 12 month rolling average last year and is less than half what it cost between 2011 and 2014. Next year, if the price of oil (in sterling) returns to the same price as it was on average in 2019, it would represent an increase of 70%. The last time the rolling 12 month average price of a barrel of Brent Crude priced in sterling increased by more than 50% in one year was between 2007 and 2008 (up 52%)…and we know happened to the UK economy as a result.

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