03/07/08

Market volatility

We are still seeing a volatile global investment market, which we expect to continue on through the rest of 2008. You can best see the change in the level of volatility in the following 2 graphs. They show how the different asset classes have performed over the last 5 years and the last 6 months. The 6 month chart in particular highlights the increased volatility found across all asset classes.

Market volatility Graph 1 above - 1841 Days from 30/05/2003 to 13/06/2008

Market volatility Graph 2 above - 164 Days from 01/01/2008 to 13/06/2008

But it is not all doom and gloom as portfolios are constructed for the medium to long term. We are constantly monitoring the markets and funds and there are still sound investment opportunities both in the UK and globally and good funds out there for us to invest in.

03/07/08

The increase in the cost of living

We are almost half way through 2008 and the global credit crunch and its ripple effect shows no sign of slowing down. What was originally hitting large global companies in the pocket is now having an impact on us all. Every week brings news of another bank in trouble, an increase in the price of oil, increases in the cost of fuel at the garage pumps (now commonly over £1.30 litre) and demand for food from places like China and India, which is pushing up prices in UK shops.

As our money isn't going as far as it used to we are looking at ways of saving money. Here are some tips on how to budget and plan ahead for whatever age or stage of life you are at.

03/07/08

Inflation - what is it?

Inflation is best described as the increase in prices over time. The supply of money in the economy, the strength of demand for goods and services and the cost of their production, the level of incomes and the balance between imports and exports all help to determine the inflation rate.

Why is there more than one inflation measure?

Basically because there are many different ways of measuring the way that prices change.

Both the Consumer Prices Index (CPI) and Retail Prices Index (RPI) are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated.

The RPI measure is arguably the better known in the UK. Sometimes referred to as the "headline" rate of inflation, it is the rate often cited by unions as a benchmark for agreeing pay settlements.

The CPI measure is the rate the government's inflation target is based on. It is an internationally comparable measure of inflation - CPI inflation measures are analysed by the European Central Bank when setting interest rates in the eurozone.

How are they calculated?

Both the CPI and RPI are an attempt to measure the changes in the cost of buying a representative basket of UK goods and services. The methods used to calculate both indexes are similar. Each month thousands of prices for a selection of goods and services are analysed to check on any increases.

Each year, the make-up of the "basket" of good and services, and the weightings assigned to them, are revised to take into account changes in spending patterns. For example, in recent years people have tended to spend more of their money on electrical goods, travel and leisure, while the proportion they have spent on basic items such as food has fallen.

So why do the CPI and RPI values differ?

Not all the items covered by the RPI are included in the CPI measure.

For example, the CPI does not include Council Tax, mortgage interest payments and some other housing costs. The CPI measure also includes some items - such as charges for financial services - which are not in the RPI.

Another difference is that the CPI measure covers a broader sample of the population in its calculations than RPI.

Why does the government target the CPI rate?

• The government cited three reasons why CPI was a better measure for the purposes of setting monetary policy:
• it gives a more realistic characterisation of consumer behaviour
• it gives a better picture of spending patterns in the UK
• it is a more comparable measure of inflation internationally and represents international best practice

The government's current target for CPI is 2%, which the Bank of England is tasked with hitting. If the rate moves by more than one percentage point either way - that is, it breaks out of the range 1-3% - the governor of the Bank of England must write to the chancellor to explain why.

Why inflation is in the news this week?

The latest CPI rate rose by 3.3%, which is over the agreed level and required Mervyn King to write to Alistair Darling. In this letter the governor of the Bank of England explained that rising food and energy prices could push UK consumer inflation above 4% this year. Mr King wrote "I must stress however, that there are considerable uncertainties, in both directions, around this, and any such projection is particularly sensitive to changes in domestic gas and electricity prices," he said.

Mr King has had to write such a letter to the chancellor only once before, when inflation hit 3.1% in April 2007.

Why the rise?

The biggest contributor to consumer inflation was the rising price of food and non-alcoholic drinks. This was mainly due to the increasing cost of meat products, particularly bacon, and vegetables. Increasing household energy bills were also a significant factor, along with the rising cost of books, stationery and foreign holidays. However, this rise in the cost of leisure and recreation was offset by a fall in the price of DVDs.