Britannia Radio

Depressed pensions and raging inflation are all that's on offer 
today.  Cheering isn't it?

xxxxxxxxxxxxxx cs 
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TELEGRAPH    28.3.09
1. Pensioners to be first victims of quantitative easing
Why quantitative easing will knock 10pc off pensioners' income

By Ian Cowie

Millions of older people have good reason to be glad that the Basic 
State Pension is uprated in line with September's Retail Prices Index 
(RPI), rather than the zeroflation announced for the year to February 
this week. As a result, pensions will rise by 5pc next month, which, 
even if you have your doubts about the relationship between reality 
and RPI, is better than nothing at all.

But hundreds of thousands of people now nearing retirement will not 
be so lucky. They are among the first victims of "quantitative 
easing", the economists' euphemism for our Government's desperate bid 
to spend its way out of the debt crisis. Perhaps at this point it is 
only fair to suggest that those of a nervous disposition should look 
away. Others may feel the need of a wet towel to wrap around the head 
or a very strong cup of tea.

Annuities - the guaranteed income for life that most savers with 
money purchase or defined contribution pensions buy when they retire 
- are based on gilts, another name for bonds issued by the British 
government. Quantitative easing entails buying back vast quantities 
of gilts. This has pushed up their price and forced down their yield, 
the income paid by these fixed-interest bonds expressed as a 
percentage of what they cost on the stock market.

Do try to keep up. What it all boils down to, for people unlucky 
enough to be forced by their date of birth to have to turn a 
lifetime's saving into a retirement income today, is that annuities 
are yielding 10pc less than they were a year ago. In cash terms, that 
means a 65-year-old man retiring with £100,000 savings will receive 
£805 less pension this year than he would have got a year ago.

Assuming our unlucky saver has an average lifespan, that means he 
will receive £17,000 less retirement income than if he had bought his 
annuity a year ago. Don't take my word for it. Nigel Callaghan, 
pensions analyst at wealth managers Hargreaves Lansdown, did the sums.

If the macroeconomics of how a bad situation might be made better by 
throwing £75 billion of public money at the gilts market leave you 
baffled, join the club. There is every chance taxpayers will lose 
even more on this deal than the last time Gordon Brown was kind 
enough to give the money markets advance notice of his intentions 
before he sold half our gold reserves at what turned out to be the 
bottom of the bullion cycle. [His advance notice was the cause of the 
crash in gold prices -cs]

If there were any doubt that Culpability Brown can now "do the 
double" by investing vast sums of taxpayers' money in gilts at the 
very peak of the bond cycle, then the flop of this week's gilts 
auction - the first to fail in 15 years should dispel them. 
Institutional investors decided they would rather not buy fixed 
interest bonds just as the Government's efforts to avert deflation 
look set to ignite inflation.

If more people understood what is going on, it wouldn't just be kids 
rioting outside the G20 economic summit in London's docklands next week.
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2. Threat of inflation is Labour's legacy

We listed another few degrees to port during the last three months of 
2008. Those groping for the lifeboats will already be aware of this 
lunge down but it's only now that the official statisticians have 
officially declared that the economy sank 1.6pc compared to the 
previous estimate of 1.5pc.

By Damian Reece

The IMF reckons we'll be down 3.8pc this year in total, the most 
serious damage to the economy since the Second World War.

Which makes it an odd time to be worrying about inflation. Earlier in 
the week when most people were expecting RPI to fall into negative 
territory and herald our first bout of deflation since 1960, the dial 
stuck at zero.

CPI, the inflation measure introduced by Gordon Brown, actually rose 
to 3.2pc but the received wisdom is that this is just a blip and 
inflation is not back and will slip into negative territory soon. 
Which is true for the time being, but the threat of inflation could 
be one of the lasting legacies of this Labour government.

When you consider that in the financial year about to start the IMF 
reckons we will suffer the biggest government deficit in the Western 
world - 11pc of GDP or £150bn - then the only way these colossal 
annual sums can be dealt with will be with the help of inflation, 
which has the effect of devaluing debt obligations as every home 
owner with a mortgage discovered to their delight in the 1970s.

It's not too hard to imagine how in 2010-11 a banking recovery will 
underpin economic growth reversing people's inflation expectations 
from negative to positive. Higher taxes and tighter public spending, 
which our public debt situation also decree, will keep the lid on 
another housing boom but the same constraints we recently witnessed 
on the supply of energy and other commodities, including food, have 
disappeared only temporarily.

Controlling rising inflation will be just as much of a headache for 
the Bank of England in years to come as slashing rates to avoid 
deflation is now. One of the shams of the past 12 years is how we've 
targeted inflation to try to control it. Missing were property and 
other financial assets which were allowed to boom like never before 
while official inflation measures were full of everyday items falling 
in price as global competition cut costs creating an entirely false 
sense of security.

Before prices are allowed to start rising again, a sensible policy 
would be to reform inflation targeting tools to try to reflect what's 
really going on in the economy rather than encourage and contribute 
to Labour's illusion of wealth all over again.