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The UK’s Inflation Sudden Rise

The end of aid to the HoReCa sector and Brexit pushed up British inflation, which worsened supply and production chains.

By EC Invest

British inflation rose sharply: in August, it reached 3.2% against only 2.0% in July. And as is often the case these days, the timing of measures to help the economy, whether the pandemic, is the main responsible.

In the British case, in August 2020, London instituted the “Eat Out to Help Out” program, which subsidized meals prepared by the restaurant industry to keep it afloat. However, as prices returned to normal one year after introducing this measure, the increase in restaurant prices was the main reason for the one-year rise in inflation.

However, inflation is not alone. The supply or production chain problems experienced by some sectors of industry are well known throughout the UK. The issue was the exit of the country from the single market and the European customs union, which created new obstacles to external trade and undermined already strained supply and production chains. In addition, there is a lack of workforce due to difficulties in obtaining work permits for European citizens wishing to travel to British territory. As several border controls are still not being applied by London, there is a good chance the situation remains unsolved anytime soon.

Although the announcement of inflation pushed interest rates on the British debt towards a slight increase, they remain, at less than 0.8% for ten years, deficient in absolute terms and largely harmful in real terms. In addition, the British pound, which weakened since its exit from the EU, has lost some of its former quality as a safe haven.

BRITISH INFLATION (Annual evolution, in %)

So we see few arguments for buying the British bond, especially since debt control is far from being a priority for London, whose last balanced budget dates back... in the year 2000.

However, we do maintain a small presence in the UK equity market as a diversification.

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