Get ready to say “hello” to inflation
With the collapse of both supply and demand, this was no ordinary recession. But as the world returns to normal, supply will remain subdued as demand explodes. That can only mean one thing, says Merryn Somerset Webb: inflation.
The post-Covid-19 world will be much the same as the pre-Covid-19 one in lots of ways. We will drift back to our offices. We will flood back to bars and restaurants. We will cram on to planes and cruise ships to catch up on the sunshine and rosé we have mostly missed out on over the last nine months. But one thing might seem a little different: the recovery. We told you at the very start of the crisis that it was something we hadn’t witnessed before – simultaneous demand and supply shocks. Demand collapsed as we were confined to our homes. Supply collapsed as factories shut and transport routes withered. This was no ordinary recession.
It still isn’t. Unemployment has stayed relatively low in the UK so far and has fallen to 6.7% in the US – which may continue given that many US firms will only be able to turn their state-backed loans into grants by showing they have rehired laid-off workers by the end of the year. Consumer confidence has recovered bizarrely fast (reaching a ten-month high earlier this month). And most unusually of all, bank deposits have soared.
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But here’s the thing. That sharp rise in demand is not being met by supply, something those of us brought up in an age of get-anything-you-like-anytime-globalisation simply aren’t used to. If you’ve been trying to buy, say, a house, or perhaps a high-performance, remote-control monster truck for your son for Christmas, you’ll know what I mean. One sign of the scramble to refill warehouses? Having collapsed in March and April, large truck sales are booming, says James. Some say that the defining phrase of 2020 will be “you’re on mute”. For me it is “out of stock”. Rising demand meets static supply? We all know what that means. Get ready to say hello to inflation.
The return of inflation – if it happens – will mark a huge turning point. We’ve been used to very low inflation – so much so that even 2%-3% might make a huge difference to how we invest (and feel), particularly if interest rates on savings don’t rise to compensate us (they won’t). You may be worried about actual wealth taxes (with good reason). But if inflation takes off and rates stay low, the dynamics of the next decade, for those who take no action, could be just one long wealth tax. Gold is one place to hide (see page 18). Equities are another – see this week's magazine for our writers’ top tips for 2021. Finally, I’d love it if you would listen to next week’s podcast (moneyweek.com/podcasts) with top strategist Russell Napier (out on 22 December). Do that and you will definitely be better prepared for 2021 than most.
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