A Lesson from the UK – Not the Right Time to Cut Tax Rates

Mortgage bonds continue to benefit from leadership failures in the UK.

Within 45 days of being elected, UK Prime Minister Liz Truss is having to roll back her plans to cut the tax rate on their highest income earners.

Since tax cuts are tremendously inflationary, the announcement of the planned tax cuts sent immediate shockwaves through bond markets around the globe, even forcing the Bank of England to settle the turmoil by injecting cash into their bond market.

Further, since interest rates are globally connected, even rates in the US jumped to record levels not seen in decades, all from this single announcement.

After a number of days of wreckage, Prime Minister Truss was forced to abruptly reverse the tax-cut plan, which has caused bond yields to fall around the globe. This is helping to soften interest rates here in the US, which is welcomed news.

As you can see from the chart below, inflation has moved from Goods to Services.

The positive news is that the prices of Goods are currently falling.