The shift from cash to stuff

I keep being told I worry too much about inflation. Given that the banking crisis never went away, that Europe's implosion is closer than ever, and that low global demand is bound to hit oil and other commodity prices, I should surely be fussing about falling prices, not rising ones.

But it isn't the case that an underlying deflationary macro-environment precludes consumer price inflation. If it did, the UK Consumer Price Index (CPI) wouldn't be rising at nearly 5% a year. The case for more inflation in Britain is based not on a sudden recovery of bank lending and consumer demand, but on several things. Think more quantitative easing (QE) here; more QE everywhere else; more global unrest causing a new hike in oil and gas prices or disrupting international supply chains; and more rises in food prices. Until two weeks ago, a pack of Sainsbury's chipolatas weighed 400g and cost £2.59. Now a pack weighs 375g and still costs £2.59. That's a price rise of 6.5%.

The general public at least are aware of some of this. A recent survey showed 40% of people think thatfive years from now, UK inflation will be not 2%, but 10% (which is why 500,000 people invested in the now-withdrawn NS&I index-linked bonds). The question is when they might do something about it because that's when we might get the worst kind of inflation of all. Fear-driven, demand-push inflation. Let's look at the rich. Consensus opinion notes that the rise in the price of London houses is all about foreigners looking for safe havens.

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But why buy a house to protect your money? Why not just hold a deposit in pounds? Using the cash to buy physical assets could suggest something else that foreigners don't think the currency alone is a safe haven. That could be why the rise in the price of 1,500-plus square foot flats in London over the last three years is just about the only thing that has matched the rise in the price of gold: up 81%. It could also be why wine and art auction prices regularly hit new records. It could be why classic car prices, having been in the doldrums for decades, have started to rise sharply.

Maybe the Chinese have suddenly realised that no billionaire can survive without a ten-car garage filled with vintage Rolls-Royces. Or maybe the rich, spooked by QE and competitive currency devaluations, are shifting out of cash and into stuff. But if the rich are doing this, when might the general public follow suit?

The first step for most people in times of inflation is to save more to meet next year's bills. But at a certain point (8%? 10%?) it starts to become rational instead to spend on tangible goods that might have a sale value later. But what? I'm watching brown furniture and silver antiques, both things the middle classes used to put much store by. If they start pillaging their savings to buy them again, it'll be a sign of trouble ahead. Nothing causes inflation faster than fear of inflation.