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.
-
What is an IPO?When a private company decides to sell shares in itself on the stock market for the first time, it conducts an “IPO”. Here's what that means.
-
Auto stocks plunge as Trump announces 25% tariffsDonald Trump’s latest tariffs will apply to cars and automobile parts coming into the US – but American companies and consumers will feel the effects too
-
Spring Statement: Rachel Reeves 'must turn good intentions into effective measures'Opinion Chancellor Rachel Reeves understands the economy’s structural problems but is unlikely to solve them, says Max King
-
England's department stores return – but do they have a future?Opinion The great traditional retail shops of Middle England have bounced back for now. Don’t get too carried away though, says Matthew Lynn
-
Can investors stay optimistic about Russian stocks?Investors look to profit from Russia as Trump pushes for peace in Ukraine. But is it worth the risk?
-
Labour's 'Project Chainsaw' begins by abolishing NHS England – will it backfire?Keir Starmer is taking the fight to the blockers, the NIMBYs, public sector workers and the unions says Emily Hohler. What happens if Labour fails to deliver?
-
The benefits of a stock bubbleOpinion We tend to think of stock bubbles as bad things but, as the dotcom craze shows, good things can come from them, says Matthew Lynn
-
Friedrich Merz proposes 'radical' spending package for GermanyGermany's chancellor designate Friedrich Merz wants to scrap restraints on borrowing and allow for much higher defence spending
-
Walgreens Boots Alliance sold to private equity firm - will Boots get the boot?US pharmacy giant Walgreens Boots Alliance is going private. Will the new owners sell off the high-street chemist?
-
Europe prepares to stand alone as Trump turns on UkraineSupport for old military alliances is wavering in the US under Donald Trump. Europe’s leaders are rushing to fill the void. Simon Wilson reports
