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from this morning's newslwetter - sorry if it's already posted...

Many economists have been dismissing inflation as not being a threat to the UK economy. Although oil prices are still high, they are no longer rising at the same rate as they did during 2005, which means they are having less impact on the official inflation statistics.

Oil prices are of course, still much higher than they were for most of last year. But as long as they aren’t actually continuing to rise by much, the Bank of England has a better chance of hitting its 2% inflation target. And if oil prices start to fall – well, that would be even better.

But of course, if you need to use oil to make things, then it doesn’t really matter that it has stopped rising in price on a month-to-month basis. It’s still costing you about 60% more than it did last year. A company can absorb that pain for a certain period of time. Companies are very reluctant to charge their customers more when competition is so fierce.

But if raw material costs don’t show any signs of falling, then at some point you have to bite the bullet and start passing those costs on. And producer output prices rose by 2.9% in the year to January, above expectations for a 2.7% rise, and substantially higher than December's 2.4% annual inflation rate.

“We are starting to see signs of output prices…catching up with input prices. In turn this implies firms are clawing back pricing power, as the burden from input costs rises ever higher,” BNP Paribas economist Alan Clarke told the BBC.

The worry is that when manufacturers hike their prices, that starts to push pressure further down the supply chain, until eventually consumers are being charged more in the shops. When that happens, people start asking for higher wages, which pushes employers’ costs up further, which again leads to higher prices, and so on in a vicious spiral.

And employees are feeling the pressure from both sides. It's not just rising costs - they also have a huge debt burden to service. The Daily Telegraph reports that consumer debt is now higher than the UK’s annual economic output.

The total amount owed by UK households rose to £1.158 trillion last year. That’s over £30bn more than the UK economy generated in 2005, according to Treasury figures.

You read that correctly. Even if all the wealth generated by the UK economy in one year was put towards paying off all our mortgage, credit card and overdraft debt, we’d still be in the red by the end of the year.

All that debt hasn’t put diehard landlords off buying new properties – at least that’s what the property pundits like to tell us. Buy-to-let lender Mortgage Trust breathlessly exclaims that 30% of landlords are currently buying more property. And a full 83% reckon that house prices will rise by “2% or more over the coming year.”

But if we look into the statistics in a bit more detail, we find that more than 75% of landlords reckon house prices will rise by 2%-5%. And only 7.4% reckon prices will rise by more than 5%.

In other words, the vast majority of buy-to-let investors believe their investments will barely beat inflation this year. It's hardly an upbeat outlook on the sector. No wonder less than one in three are actually buying new properties.

This demonstrates an investment lesson peculiarly relevant to Valentine’s Day – never become emotionally attached to a single asset class or share. In the heady days of 20% annual gains, it can seem like the love affair will never end. But when the returns fade, you can easily end up disappointed and out of pocket if you don't let go. Not unlike an ill-judged love affair...

And for those still to experience the heady thrills of investment, our series of "How to" guides continues. Just click here to learn more about investing in funds: Should you buy into a fund? (http://www.moneyweek.com/file/3033/investment-funds.html)

Turning to the stock markets...

The FTSE 100 rose 29 points to close at 5,793. Miners were again among the main losers, with BHP Billiton down 1% to 943.5p. For a full market report, see: London market close. (http://www.moneyweek.com/file/8208)

Over in continental Europe, the Paris Cac 40 gained 46 points to end at 4,957, while the German Dax rose 54 to close at 5,756.

Across the Atlantic, US markets fell back. Cleveland Federal Reserve president Sandra Pianalto rattled markets by saying that economic growth seems to have picked up, raising fears that US interest rates will keep ticking higher. And internet giant Google slumped nearly 5% as financial weekly Barron's warned its shares could be cut in half amid competition from Microsoft and Yahoo. The Dow Jones fell 26 points to 10,892, while the S&P 500 slipped 4 to 1,262. The tech-heavy Nasdaq slid 22 to 2,239.

In Asian trading hours, oil was lower, trading at around $61 a barrel in New York. Brent crude was trading at around $58.90. Meanwhile, spot gold fell back to trade as low as $534.50 an ounce, before picking back up to around $538. Speculation about higher US interest rates is hurting the yellow metal.

In Asian stock markets, the Nikkei 225 rallied 307 points to 16,184. More and more money is flowing into mutual funds - the Investment Trusts Association reported that funds' net assets increased for the ninth month in a row in January, to $47.8bn, the highest since October 2000.

And in the UK later today, consumer price inflation figures for January are released. High energy costs are expected to have pushed annual inflation to at least 2.1%, though some comentators reckon it might reach 2.2%.

And our two recommended articles for today...

A cheap way to make money from China

- Up until recently, the best plays on China's growth were Japanese stocks and commodities. But both asset classes have come so far that investors might be better off looking for another way to gain exposure to the Chinese economy, says MoneyWeek editor Merryn Somerset Webb. Fortunately, one global stock market offers great exposure to China - and it still looks cheap. To find out what it is, click here: A cheap way to make money from China (http://www.moneyweek.com/file/8228)

Is the US property bubble set to pop?

- For several years, low interest rates have fuelled soaring house prices in the US. This has enabled US consumers to borrow money against the value of their homes to keep spending, despite falling real incomes. But the latest data suggests that the whole "house of cards is on the verge of collapse", says Jeremy Batstone of Charles Stanley. To find out why it's increasingly looking like a buyers' market across the Atlantic, click here: Is the US property bubble set to pop? (http://www.moneyweek.com/file/8226)

Until tomorrow,

John Stepek

Money Morning

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  • 341 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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