Inflation has returned – and it will get worse
Signs of inflation are everywhere. And companies around the world are already raising prices as the price of raw materials climbs.
The US government is running “an inflation experiment”, says The Economist. President Joe Biden is pushing for $4trn of new spending on infrastructure and social programmes. On the monetary front, the US Federal Reserve is more relaxed about inflation exceeding its target of around 2% than it used to be.
The Fed learns to love inflation
America’s consumer price index (CPI) rose by 2.6% on the year in March. The monthly increase of 0.6% was the biggest in nearly a decade. UK inflation has been more subdued but is also heading higher; prices rose by 0.7% in March year-on-year, with inflation forecast to hit or breach the 2% target by the end of the year.
The US economy is booming, expanding at an annualised rate of 4% in the first three months of the year and likely to grow even faster in the current quarter. Yet the Fed has refused to cut back on crisis measures, especially its $120bn in monthly quantitative easing (QE)-funded asset purchases.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
That is partly because Fed chair Jerome Powell is waiting for employment to recover, says Justin Lahart in The Wall Street Journal. There are still 8.4 million fewer American jobs than before the pandemic, although recent jobs growth has been impressive. He also insists that current inflation is “transitory”, driven by growing pains as the economy reopens and a weak comparison period last year.
Many investors remain relaxed: they think Powell will rein things in if inflation really surges. But the Fed has made it clear “that it is in no hurry to tighten”. They should listen to what the Fed actually says, not what they wish it would say.
Big Business hikes prices
Signs of the new inflation are everywhere, says Jeremy Warner in The Daily Telegraph. Copper prices have topped $10,000 a tonne for the first time in over a decade, shipping rates have soared and computer chips are hard to come by. The unprecedented scale of fiscal and monetary stimulus in the rich world will turn into inflation once economies fully reopen.
Firms are already hiking prices, say Judith Evans and Emiko Terazono in the Financial Times. Consumer goods giants such as Nestlé and Unilever point to soaring input costs. Palm oil prices have doubled since spring last year. Packaging costs are up by almost 40% since the start of 2020. In Europe, milk prices have soared by about 50% so far this year. Consumers had been insulated from these price surges because big firms use hedging contracts to keep their input costs predictable. Yet as those contracts expire prices will climb.
US executives have mentioned the word “inflation” more frequently in their latest earnings conferences than at any time since 2011, says Lu Wang on Bloomberg. Not that they’re worried: the net margin of S&P 500 firms has hit its highest-ever level, according to Bank of America. That is a testament to the pricing power of big business, which is able to pass higher costs directly onto customers. For now at least, corporate earnings are thriving in the era of higher inflation.
-
Rightmove: Asking prices edge closer to record peak
Asking prices have been driven up by the top-end of the market, Rightmove has found. But how does the situation look in your area?
By Vaishali Varu Published
-
Coventry Building Society bids £780m for Co-operative Bank - what could it mean for customers?
Coventry Building Society has put in an offer of £780 million to buy Co-operative Bank. When will the potential deal happen and what could it mean for customers?
By Vaishali Varu Published
-
Should your business invest in a VoIP phone service?
Here's what you need to know about VOIP (voice over IP) services before landlines go digital in 2025.
By David Prosser Published
-
The end of China’s boom
Like the US, China too got fat on fake money. Now, China's doom is not far away.
By Bill Bonner Published
-
What is the future of Royal Mail in the UK?
With fewer of us sending letters and parcels, the Royal Mail is finding dealing with the nation’s post is an increasingly unprofitable and costly business.
By Simon Wilson Published
-
What's the secret of Manolo Blahnik's success?
Fashion maestro Manolo Blahnik shows little sign of slowing down at 81, and his company notched up a record financial year in 2022. What is the secret of his success?
By Jane Lewis Published
-
Michelle Mone's "tough year of pain"
Michelle Mone liked to portray herself as a working-class heroine who worked her way to the top through grit and determination. But her pedestal is built on sand.
By Jane Lewis Published
-
Trevor Milton, the Elon Musk wannabe, is jailed for fraud
The former CEO of Nikola, Trevor Milton, has been found guilty of lying about the development of the company's electric trucks.
By Jane Lewis Published
-
Directors should think twice before waiving limited liability
Should small-business directors ever provide a personal guarantee in return for bank finance?
By David Prosser Published
-
Why Russia's economy is doing better than predicted
Sanctions were supposed to strangle Russia’s economy, but it seems to be thriving. What’s going on?
By Simon Wilson Published