Inflation is coming and it will have “‘Made in Asia’ stamped all over it”, says Richard Cookson on Bloomberg. The continent’s economy is “humming”, driving a boom in the price of commodities such as copper. Expect inflation to “pick up both soon and sharply”.
A wall of money
Inflation remains quiescent for now. Consumer prices rose by an annual 0.7% in the UK in October; US prices by 1.2%. Yet financial-market expectations for average US inflation over the next decade recently hit the highest level in 18 months, say Colby Smith and Tommy Stubbington in the Financial Times: the so-called ten-year “break-even-rate”, derived from inflation-linked and conventional Treasury bond yields, topped 1.8%. The yield on US ten-year Treasuries has climbed to 0.9% since the summer. That suggests investors are seeking more of a cushion against a possible inflationary surprise.
Central banks worldwide have unleashed a phenomenal amount of monetary firepower in response to Covid-19. As Jeremy Warner notes in The Daily Telegraph, the worldwide stock of central bank asset purchases has gone from $11trn before the crisis to $17trn today. At £886bn, the Bank of England’s balance sheet is already worth about 40% of 2019 UK GDP.
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
US Federal Reserve records going back to 1981 show that year-over-year growth in the American M2 measure of money supply had never topped 15% before this year, Mike Wilson of Morgan Stanley tells Thomas Franck on CNBC. Yet M2 surged 20% in the first seven months of 2020 alone. “We have never observed money supply growth as high as it is today”.
Demography is destiny
For now, much of that extra money is being hoarded by savers and corporations, but that won’t last, says Cookson. Thanks to the vaccines, developed economies are poised to stage a recovery early next year, but rising demand will run into constrained supply; plenty of businesses and factories have folded in 2020. Despite the epic demand destruction wrought by the pandemic, the price of global traded goods has fallen by less than during the global crisis of 2008.
A book by academics Charles Goodhart and Manoj Pradhan predicts a new era of high inflation, says Martin Wolf in the Financial Times. In The Great Demographic Reversal, they say ageing populations will mean a smaller global labour force in future decades, reversing the deflationary pressure caused by China’s emergence as a manufacturing powerhouse starting in the 1980s. A backlash against globalisation in developed nations will only compound the inflationary effect. The last few decades of “lower for longer” inflation and interest rates may be entering its denouement.
All this bodes well for gold, the classic inflation hedge. More fiscal stimulus (see below), “out-of-control debt ratios”, low interest rates and a weaker dollar all mean it is set to shine in 2021, says Peter Grosskopf of investment manager Sprott.
-
UK-US trade deal announced: US cuts tariffs on UK car imports to 10%Keir Starmer and Donald Trump have announced a UK-US trade deal, but the US president has refused to lift baseline tariffs on most UK goods. What does it mean for the UK?
-
How to use mid-caps to diversify from the USMedium sized companies are overlooked by investors but could offer an attractive ‘sweet spot’. We consider the case for mid-caps amid market volatility.
-
Do we need central banks, or is it time to privatise money?Analysis Free banking is one alternative to central banks, but would switching to a radical new system be worth the risk?
-
Will turmoil in the Middle East trigger inflation?The risk of an escalating Middle East crisis continues to rise. Markets appear to be dismissing the prospect. Here's how investors can protect themselves.
-
Inflation is tamed at last – when will interest rates fall?UK inflation may have hit the Bank of England target but it's unlikely to stay that way for long. What does that mean for interest rates?
-
Inflation back to Bank of England target – what does it mean for you?The Consumer Prices Index (CPI) slowed again in May, hitting the Bank of England’s inflation target for the first time in almost three years. When will interest rates go down?
-
US inflation rises to 3.7% as energy prices surge - will the Fed hike rates?US consumer price index rose in August but markets do not expect a rate hike this month
-
Would a food price cap actually work?Analysis The government is discussing plans to cap the prices of essentials. But could this intervention do more harm than good?
-
UK inflation jumps to 10.4% in FebruaryNews The rate of inflation increased in February following two months of falls, increasing pressure on households and the Bank of England ahead of its interest rate meeting tomorrow.
-
When will UK inflation fall back to the BoE’s target?Advice Inflation has started to slow, but it could remain high for some time as underlying pressures build
