Inflation Rises Puts Sterling and Real Estate Under Pressure
13th August 2008
Inflation Soar to a 16 Year High as Sterling Takes a Tumble
The global economic outlook seemed more grey yesterday as the Pound Sterling tumble to a record 21-month low, falling to six percent against the US dollar to 1.90. With rising inflation I am predicting that the Sterling will take a further tumble. City economist warned yesterday of the increasing prospects of recession further adding to Prime Minister Brown warning at the G8 summit recently of the chances of recession.
Official government data yesterday revealed a 4.4 percent rise in Consumer Price Inflation (CPI), doubling to more than the two percent target set by the Bank of England (BoE). This can be seen as a direct result of the spiralling rises in the cost of food and oil.
The retail price excluding interest payment (RPIX) measures of inflation is regarded as the more accurate guide to living costs and this rose by 5.4 percent. There is also a 0.8 percent month-on-rise in food prices which is reflective of higher meat and bread prices. Annual food price inflation is now running at 12.3 percent. Economist such as George Buckley, chief UK economist at Deutsche Bank believes the economy is presently in recession and is now forecasting growth below zero for the third and fourth quarters for this year.
The crises in the Caucases created more uncertainty in the market place as British oil giant BP closes the second of the three pipelines it operates through Georgia yesterday and only within hours of Russia ending military operation against its former soviet state. BP is part of a 10-strong consortium that runs a series of pipelines from the Caspian Sea into Georgia. BP closed the Western Export Pipeline from Baku, Azerbaijan to the Georgian Black Sea port of Supsa which carries 90,000 barrels of oil per day. This follows the closure last Wednesday of a second pipeline in Baku-Tbilisi-Ceyhan which carries 1.2m barrels a day.
BP has no timescale for reopening the pipelines and although accounting for only one percent of global oil consumption, their closure will place further pressure on oil prices and inflation.
The current sharp rise in inflation would automatically lead to rises in interest rate but with the economy teetering on the brink of recession I believe any rise in interest rate by the BoE will not be any time soon. Further rises in interest rate would further place the housing sector and home mortgages under further pressure, which the BoE is desperate to avoid.
With rising prices and rising inflation I am predicting that the Sterling will take a further tumble against the dollar as well as against the Euro.
Pressures on Global Real Estate
The pressures on oil prices will result in rising construction cost and a fall in real estate value as home buyers confidence fall. However, the educated property investor will know that property is always a good bet against inflation in times of economic uncertainty so investors should continue to put their pennies in real estate as it carries less risk. In today’s economic climate emerging markets such as Tunisia and Brazil will be your best bet.
One market which is said to be unaffected by the European and American problems within the property sector is Poland but this requires further investigation.
I am predicting that the main non-residential property sectors that will suffer the most ‘knock on effects’ from the current economic turmoil will be hotels and offices. Holiday-makers will suddenly realise their Sterling cannot stretch as far as usual and the crises in the financial sector will result in companies going out of business, especially mortgage brokers. Business closures and fall in new businesses taking up office premises will lower occupancy rate within the office sector putting office yields under pressure.
Report Author: Kevine Walcott
Analyst and Consultant, Walcott Investment Ltd
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