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.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
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.
-
The UK regions with the highest proportion of homes above the inheritance tax thresholdHigh house prices are pushing more families into the inheritance tax trap across the country
-
Are money problems driving the mental health crisis? MoneyWeek TalksPodcast Clare Francis, savings and investments director at Barclays, speaks about money and mental health, why you should start investing, and how to build long-term financial resilience.
-
UK small-cap stocks ‘are ready to run’Opinion UK small-cap stocks could be set for a multi-year bull market, with recent strong performance outstripping the large-cap indices
-
The scourge of youth unemployment in BritainYouth unemployment in Britain is the worst it’s been for more than a decade. Something dramatic seems to have changed in the labour markets. What is it?
-
In defence of GDP, the much-maligned measure of growthGDP doesn’t measure what we should care about, say critics. Is that true?
-
Reach for the stars to boost Britain's space industryopinion We can’t afford to neglect Britain's space industry. Unfortunately, the government is taking completely the wrong approach, says Matthew Lynn
-
"Botched" Brexit: should Britain rejoin the EU?Brexit did not go perfectly nor disastrously. It’s not worth continuing the fight over the issue, says Julian Jessop
-
'AI is the real deal – it will change our world in more ways than we can imagine'Interview Rob Arnott of Research Affiliates talks to Andrew Van Sickle about the AI bubble, the impact of tariffs on inflation and the outlook for gold and China
-
Tony Blair's terrible legacy sees Britain still sufferingOpinion Max King highlights ten ways in which Tony Blair's government sowed the seeds of Britain’s subsequent poor performance and many of its current problems
-
How a dovish Federal Reserve could affect youTrump’s pick for the US Federal Reserve is not so much of a yes-man as his rival, but interest rates will still come down quickly, says Cris Sholto Heaton
