Ticking away the moments that make up a dull day, news finally came out from the Bureau of Labo(u)r Statistics, part of the US Department of Labo(u)r, that inflation reached 3%, which was more tepid than anticipated. The result being greater expectation that the Fed will reduce interest rates when they next meet. Markets reacted positively as the FTSE100 index ended on a record high whilst the US indices reached a peak during the day’s trading session.
In the UK, the main takeaway from this week’s slightly lower-than-expected inflation rate of 3.8% is a sense of relief that weekly shopping isn’t getting more expensive. For economists, the big question is what it means for interest rates. Inflation is of course still well above the Bank of England’s 2% target, but signs of it easing should help pave the way for another cut in interest rates as early as at their next meeting on 6 November.
And above all, it does take the pressure off the chancellor, just a fraction, as she sweats over final plans for her Budget in five weeks’ time.
If you would like to watch a detailed and really interesting video covering this and how we might get off the escalator of ever rising taxes, then follow the link below to see Karen Ward, Chief Market Strategist EMEA at J.P. Morgan Asset Management, is in conversation with Robert Peston in an episode of the Rest is Money podcast.
Market Watch
The team at Tatton Investment Management has produced the usual Tatton Weekly which I’ve included.
- Autumn but no fall – Inflation signals are down, growth signals are up. After two weeks of feeling positively uneasy, investors have decided they had it back-to-front.
- Private markets a concern, not a crisis – Business borrowing private capital is not new, but with high profile blow ups and risk warnings from the Bank of England it is now very much in focus.
- What Britain can learn from Korean markets – With government support, Korea’s stock market turnaround from ‘most sold’, to ‘most sought after’ is remarkable – could its ‘buy local’ incentives work here?
And with their Quarter 3 investment update are Ed Robinson, Lucy Mimnaugh and Shivee Singh Gehlote from Rathbones, also attached.
Interesting Chart of the Week
Last week, &IM very astutely noted that the US equity market is heavily tilted towards a few tech stocks. But it seems other people have noticed that same thing. Weird.
Lots of other people, in fact, are starting to use a similar word …
Source: Google Trends
“Bubble” is being thrown around a lot at the moment in the context of tech and AI.
One of the most interesting comments recently came from billionaire wedding-planner Jeff Bezos. Also used to run Amazon. He distinguished between two types of bubble – financial vs. industrial.
Financial bubbles are all bad – herd mentality funnels money somewhere it shouldn’t be going. Tulips, and Beanie Babies, and NFTs.
Then boom. Everyone wakes up. The money goes away, and someone’s left holding a dead flower, a cuddly toy or a digital picture of a monkey.
Industrial bubbles are different. It’s the same FOMO psychology at work, people blindly throwing money at the same thing everyone else is. But there’s a difference:
In the late 1800’s, the industrial bubble was US railroads. 6% of the entire US economy was spent on building track. AI datacentres are ~1% today; not even close.
Everyone wanted to be a railway baron.
Which meant competition. And low profits. And loans which couldn’t be paid back. And eventually, in 1873, bankruptcies and defaults, and investors left with nothing.
An industrial bubble is still a bubble. Dangerous to invest in and disconnected from reality – one-third of the railroad companies disappeared completely in 1873.
But the money produces something useful, that outlasts the frenzy. The tracks and stations and engines still existed. Surviving companies picked them up and kept on steaming.
So, using railways became cheap and easy for millions of people and thousands of businesses – who used the bubble-built industrial infrastructure as a launch-pad.
With railroads, one of the winners was Sears Roebuck. The company saw the potential of cheap transport to bring shopping into the homes of millions of rural Americans.
Their mail-order catalogue created a brand-new industry, and they ended up being the biggest retailer in the US.
Source: Sears Roebuck
And it’s interesting to note that after another industrial bubble – telecoms in the 2000’s – another enterprising company made use of the cheap, available internet infrastructure to become the biggest retailer in the world.
Hmm. Maybe this Bezos guy knows what he’s on about.
Tax Trouble
Whatever else arrives in the Autumn Budget on 26 November we already know that one significant tax rise is underway says ED Monk at Fidelity International.
The ongoing freeze of income tax thresholds means that every year your pay rises, a bigger chunk of your income is subjected to higher rates of tax. Is this, strictly speaking, a tax rise?
The Personal Allowance – the point above which 20% tax applies – has been frozen at its current level of £12,570 since April 2021. The higher rate threshold – where 40% tax begins – has remained at £50,270 for the same period. The additional-rate threshold – and 45% tax – has fallen and now begins at £125,141 down from £150,000 in 2021.
Under plans announced by the previous Conservative government and maintained by Labour last year, these thresholds will stay in place until at least 2028, at which point the freeze will have been in place for eight years. Any new extension announced in the Budget will prolong the squeeze. The effect is known as fiscal drag, and it can be significant. This animated chart tells the story. In an alternate universe, had the higher rate threshold kept pace with rising wages over the past 25 years, it would now be £75,000, and on track to be nearly £80,000 by 2028. Instead, it remains stuck at a modest £50,270, pulling more of us into higher rate tax.
To put it another way, someone earning twice the average wage in 2000 would have paid almost no higher-rate tax. Today, had their pay risen in line with average wages, 36% of their income would fall into the 40% rate. The number of higher-rate taxpayers has jumped 78% since 2020. The number of additional-rate payers has risen 184%. In total 8.31m people now pay either higher or additional-rate tax – more than 21% of all taxpayers.
While the highest income tax band is 45% there is effectively a ‘60%’ band between £100,000 and £125,140. This is because, once you reach £100,000, each extra pound of income results in the loss of 50p of your tax-free personal allowance, which is the first £12,570 of your income. These figures are for England, Wales, and Northern Ireland; in Scotland tax rates are higher, taking the effective rate to 67.5%.
Making pension contributions is the simple way to mitigate the effects of frozen tax bands. Paying money into a pension reduces your effective taxable income so the amounts falling into the higher band reduce. It’s particularly effective if you are being hit by the £100,000 threshold and the 60% effective tax rate arising from losing your personal allowance. If your pension contributions reduce your taxable income to less than £100,000, your personal allowance will be restored in full.
Plan now for the run up to the end of the tax year, and it might make these additional contributions easier to pay.
Miscellaneous
The ageing population, falling birth rates, and growing concentration of wealth among seniors is “transforming” the types of financial protection people will need in the future reports FT Adviser. Swiss Re’s ‘Sigma’ report found 27 per cent of people in advanced markets are projected to be over 65 years old by 2050. As a result, life insurance will need to shift from income replacement and family-orientated risk protection products to wealth planning and personal-care funding solutions. Swiss Re pointed out that people living longer will strain long-term care services, which already account for more than 2 per cent of GDP in advanced economies. It added that underwriting long-term care can be “complex” given the product’s long-term nature and that current successful approaches aim at either supplementing state provision or bundling long-term care with critical illness and life covers. Another “urgent” need among this ageing population, according to Swiss Re, will be cancer protection for older policyholders. It explained that the median age of cancer diagnosis is 67, but the most critical illness policies expire before retirement thereby leaving a protection gap where the risk becomes highest.
Inheritance tax receipts have been on a one-way trajectory in recent years as rising asset values and frozen tax-free allowances leave families at the mercy of fiscal drag. Families have paid £4.4 billion in inheritance tax so far this tax year (April-September) – £100 million more than the same period a year ago, equivalent to a 2.3% jump. The Office for Budget Responsibility’s (OBR) most recent forecast, published at the Spring Statement, projects another record year for IHT. The tax is predicted to generate £9.1 billion for the Treasury in 2025/26 and its revenues are expected to raise more than £14 billion in 2029/30.
Probably not coincidentally, families are increasingly becoming embroiled in disputes over wills as loved ones seek to stake their claim on bigger, more complex estates, according to new figures. Attempts to have a will ruled invalid have surged 61% in five years, as families go to war over inheritances. There were 122 challenges to wills in 2024/25, up from 76 cases in 2020/21, Ministry of Justice data, obtained by TWM Solicitors, showed. Both of these articles from MoneyWeek show the importance of proper inheritance tax planning and there is no better place to start than your usual JB Wealth advisor.
I know we have an extra hour this weekend as the clocks go back in the early hour of Sunday morning (so don’t forget to adjust your clocks), but I won’t fill it with any more financial news and hope to catch you next time.