The price of rice!

Kenan Malik in The Guardian notes that over the past year the cheapest kilo bag of rice which cost 45p it’s now £1 for a bag half the size – a 344% price increase. The cost of a builder’s rubble bag has tripled and a skilled worker such as a carpenter can now command fees more than his project manager.

According to John More of CapX it is tempting to blame the cost-of-living crisis on ‘venal, uncaring’ politicians and ‘greedy corporate bosses’, but the reality is that rice prices have shot up due to the increase in the manufacture of fertiliser which requires a lot of fuel, the price of which has soared because of pent-up pandemic demand.

As prices go up the spending value of the pound in your pocket goes down, and any gains made on investments will be made up partly or even entirely due to the fall in the value of your pound.

In 1969 a case came before the court, Secretan v Hart. The taxpayer claimed that Capital Gains Tax should only be paid on capital gains and not rises due to inflation. He lost the case, the Court held that that the legislation at that time did not provide deductions for inflation.

In the years which followed from 1972 t0 1982 the world saw eye popping inflation. Pressure was put on the Government to introduce a relief for that part of a capital gain attributable to inflation – it wasn’t fair that tax should be paid on inflationary rises. It finally responded to in 1982 with ‘indexation’. 

Now that we are entering another period of high inflation we are once again charging inflationary gains to capital gains tax since indexation relief and its successor reliefs have all been washed away by successive capital gains tax ‘Simplification’ measures..

The basic principle of indexation introduced in 1982 was that a deduction could be made in the computation of the capital gain to consider inflation. This deduction was calculated by multiplying ‘relevant allowable expenditure’ (such as the acquisition cost and relevant capital expenditure) by the percentage increase in the Retail Price Index from the date of acquisition.

In 1988 the Government, aware that inflation had peaked, introduced a rebasing rule, which broadly provided that where assets were held on 31st March 1982 it was possible to elect that the gain would be computed by reference to the value on that date. A mechanism was also introduced by which gains on disposals were reduced or ‘tapered’ according to how long they had been held and whether they qualified as business assets.

The introduction of Taper Relief meant that indexation allowance was frozen from 1998 for Capital Gains Tax’ and was finally abolished in 2008 as part of a CGT ‘Simplification’ package. Is it arguable that we are back in the pre 1972 era and with high inflation and high interest rates which central banks are bound to introduce to curb inflation? Will we see another decade of high inflation and high interest rates?

In December 2021 the official Consumer Price Index was 4.8%. In the US according to the Economist consumer-price inflation had reached 7%, and global inflation is now 6%. This is worrying

Twelve emerging market rate setters raised interest rates in 2021. The Bank of England was one of them and it is predicted that more rises are likely according to this week’s Economist.

The Fed in the US says it plans to get interest rates back to around 2% by 2024. This means that the likely outcome is a year or so of high interest rates before they start to rebalance. Is this optimistic?

High inflation in the early 1970’s was triggered by the easy money policies of the US central bank – designed to generate full employment before the re-election of Richard Nixon but it also had the knock-on effect of high inflation.  The central bank thenhad to reverse its policies and raise interest rates to a maximum of 20%

The great inflation was followed by the great recession that wrecked many businesses and hurt families trying to maintain their standards of living

Although many people would like to blame the inflation in the 1970s on oil prices, currency speculators and greedy businessmen, the monetary policies in the US were much more to blame.

Arguably the current circumstances are very different from those in the 1970s. The Economist argues that we there is a ‘glut’ of reserves across the globe looking to make a profit but have been reluctant to invest since the crash of 2007 – 2009. However, there is a growing appetite for technological advancements and intellectual property which now accounts for two-fifths of American business investment.

This surfeit of reserves will keep the cost of interest rates down according to the Economist because it is looking to make a profit and if there is a lot of surplus cash it will in due course invest to keep the cost of borrowing down. But I am not an economist – so you like me will need to wait and see.

I welcome your thoughts.

In the meantime, please accept my apologies for the cancellation of our meetings this week. I was tested positive for Covid on Sunday and am confined to bed but will be soon back to normal. Please make a note of our meetings in March to sign up to join us.

Please let me have your comments and don’t forget to register for Caroline’s Club – it’s FREE to register and you can then learn more about our exclusive award winning club of leading private client professionals who are keen to win business and build trust with clients simply register here