Inflation has made a sudden comeback. America’s core consumer price index (CPI) – which strips out volatile food and energy costs – jumped 0.6% in July compared to June, the biggest monthly rise since 1991. In annual terms, core US CPI advanced by 1.6% last month. In Britain inflation is more subdued, with prices rising by 1% year-on-year in July, but that figure still surprised on the upside. UK core inflation rose by 1.8% year-on-year last month.
Jonathan Allum notes in The Blah! newsletter that even in Japan, “where inflation went to die”, producer prices rose by 0.6% in July on the previous month, although they remain down on the year. In China inflation rose to 2.7% last month. Widespread flooding in the country’s south has caused a spike in food prices.
The jury is still out
The “shocking” US inflation point is certainly a challenge to those like me who think we are heading for a deflationary meltdown, says Albert Edwards of Société Générale. Nevertheless, there is not enough data to draw firm conclusions yet. Falling rents have yet to feed through to the inflation figures, for example.
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
It is too early to talk of a new inflationary trend, agrees James Knightley in ING Think. Rising inflation may have been caused by an “unwinding of the strains” caused by Covid-19 shutdowns. But with 30 million unemployed in America, wages – the crucial input into prices – are going nowhere fast.
Deflation remains the greater immediate threat, says the Financial Times. The economy is just too weak to drive a classic “wage-price spiral”. That said, central bankers are coming under greater pressure than ever before to bow to the will of politicians, who prefer easy money. If the bankers don’t have the guts to raise interest rates “when the time comes” then we might eventually find ourselves back in the 1970s.
The pandemic has drawn the curtain on the era of low inflation, says Philip Aldrick in The Times. Since the fall of the Berlin Wall globalisation has kept labour prices low – think of all those cheap Chinese imports. Yet now trade decoupling is undoing some of those gains (see page 4) and the baby boomers are retiring to be replaced by a smaller pool of workers who will consequently have more bargaining power to demand wage hikes. “It’s hard to argue against demography”.
MoneyWeek’s view is that the economy is heading for an inflationary denouement. The Bank of England has unleashed £300bn in quantitative easing in a matter of months, equivalent to about 35% of all government spending in the last financial year. Unlike in 2008, this new money is not being used to repair holes in bank balance sheets but is likely ultimately to find its way into the real economy, causing rising prices.
-
DIY pension investors take tax-free cash amid switch to ISAsSelf-invested personal pension (SIPP) investors are rushing to withdraw their tax-free cash and turning to ISAs amid fears of a pension tax raid in the Autumn Budget
-
12 ways pensions could be reformed in Budget – including an alternative to charging IHTPension savers could face new rules after the Budget if chancellor Rachel Reeves targets their pots to fill her own fiscal black hole – what potential pension changes could be on the way?
-
David Ellison: America's new media mogulDavid Ellison is building a mighty new force in old and new media. Critics worry that he will prove to be a Trumpian patsy. Is that fair?
-
How Next defied the odds and positioned itself as a British high-street stapleNext rose from a near-death experience and now thrives as a high-street staple. What's driving its success – and should you invest in the retailer?
-
Why investors should avoid market monomaniaOpinion Today’s overwhelming focus on US markets leaves investors guessing about opportunities and risks elsewhere
-
Can Rachel Reeves save the City?Opinion Chancellor Rachel Reeves is mulling a tax cut, which would be welcome – but it’s nowhere near enough, says Matthew Lynn
-
Global investors have overlooked the top innovators in emerging marketsOpinion Carlos Hardenberg, portfolio manager, Mobius Investment Trust, highlights three emerging market stocks where he’d put his money
-
Investors should cheer the coming nuclear summerThe US and UK have agreed a groundbreaking deal on nuclear power, and the sector is seeing a surge in interest from around the world. Here's how you can profit
-
Healthcare stocks look cheap, but tread carefullyShares in healthcare companies could get a shot in the arm if uncertainty over policy in the US wanes, but are they worth the risk?
-
The Palace of Westminster is falling downThe Palace of Westminster is in need of repair, but the bill is prohibitive, says Simon Wilson
