Editor's letter

’Flation is gone. Inflation is back

Inflation is back, central-bankers are slowly returning to some form of normality, and the great bond bull market of the past 35 years looks to be over, says Merryn Somerset Webb.

In 1963, the now-defunct magazine The Statist reported an (unnamed) American senator as saying: "I am against inflation. I am against deflation. I am for 'flation." At the time, the UK economy was experiencing just that. Unemployment was low (2%). Wages were picking up, but not yet by much. Productivity was rising. State spending was just about under control. There was some spare capacity (about 50% of firms said they could produce more). Exports were rising (with the greatest rise, by the way, being in sales to the European common market, from which the UK was still excluded). Inflation was low and steady. In all, there was no real feeling among the experts that there was any risk out there. Too many people, said The Statist, were "too jumpy and too frightened of good news". They needed to get a grip.

If that doesn't sound familiar, it should: in our cover story, John Stepek explains the close parallels between then and now. The happy 'flation of the early 1960s soon gave way to one of the things our US senator was so against inflation. By 1967, The Statist was worrying about rising wages and angry workers; inflation was on the up, and the economic miseries of the 1970s were just around the corner. Could the same be set to happen again?

Some of it almost definitely is. 'Flation is gone. Inflation is back (low for now, but definitely back) and quantitative easing and negative interest rates are slowly disappearing from central-bank playbooks. That suggests the great bond bull market of the past 35 years really is over (when interest rates rise, bond prices fall), which will have some expected and all sorts of unexpected effects on the financial system and real economy. None of this necessarily takes us back to the 1970s what happens next depends on all sorts of variables. Will rates rise too fast? Will government spending soar? Will political pressures mean that wages outrun productivity? Will rising bond yields crash the stockmarket, and the housing market? Will rising rates be inflationary in themselves (by forcing weak companies into bankruptcy, thus cutting capacity in the economy)?

A good few interesting things have happened in the financial world in my career so far. I saw the great Japanese bear market first hand. I was in Tokyo watching dealing-room screens when the Asian crisis kicked off in 1997; we launched MoneyWeek into the dotcom crash; and we have all had ringside seats throughout the great financial crisis. However, the excitements clearly aren't over yet: the shift from 'flation to inflation and the consequent turn in the bond bull could easily be the most interesting thing yet. If you only have time to read one thing carefully in the magazine this week, make it John's story. One way or another this will affect your investments. You might as well be ready.

Recommended

The charts that matter: inflation gives markets a scare
Global Economy

The charts that matter: inflation gives markets a scare

Markets took fright this week as it looked like inflation was picking up in the US. Here’s what happened to the charts that matter most to the global …
15 May 2021
Central bank digital currencies: the future of money
Currencies

Central bank digital currencies: the future of money

The rise of cryptocurrencies and a move to cashless payments during the pandemic have left states and central banks playing catch-up. Are new forms of…
14 May 2021
No let up in house price rises as new records set
House prices

No let up in house price rises as new records set

House prices continued to boom in April, with £20,000 being added to the price of the average home in the last 12 months.
14 May 2021
Are we nearing the end of the negative bond yield era?
Government bonds

Are we nearing the end of the negative bond yield era?

As inflation gets going, the era of the negative bond yield – that investors have to pay governments for the privilege of lending them money – might b…
14 May 2021

Most Popular

Inflation is taking off in the US and markets really don’t like it
Inflation

Inflation is taking off in the US and markets really don’t like it

US inflation is at its highest for 25 years. Stockmarkets – and tech stocks in particular – have taken the news badly. John Stepek explains why, and w…
13 May 2021
Inheritance tax planning: the rules around gifting
Inheritance tax

Inheritance tax planning: the rules around gifting

There are plenty of legal ways to minimise an inheritance tax bill. Perhaps the simplest is to give away assets to reduce the size of your estate. Dav…
11 May 2021
Is it time to top up on gold? Or should you wait for a better opportunity?
Gold

Is it time to top up on gold? Or should you wait for a better opportunity?

Fears of inflation, money-printing and a global pandemic are all conditions that should drive the gold price higher. But it has been struggling. Domin…
12 May 2021