Inflation or deflation? Investors have spent the last few months piling into assets that stand to gain from a vaccine-enabled global recovery. “Frothing” commodity prices should bring higher inflation, but signs remain scant in official figures, says Albert Edwards of Société Générale. US core consumer price index (CPI) inflation, which strips out volatile food and energy prices, came in at 0% in January compared to a month before. In China, year-on-year core CPI slipped into outright deflation for the first time since 2009. “The global reflation trade may well have got ahead of itself.”
Inflation is coming
“The only way is up” for prices in America, says James Knightley of ING. Figures over the next few months will come in much higher because of base effects – the comparison period a year ago coincides with the first lockdowns, which sent prices plummeting. Add in rising energy and metals prices and inflation in the world’s biggest economy looks poised to “sail well above 3%” this spring.
Vast fiscal and monetary stimulus should keep the inflationary train chugging: President Joe Biden’s $1.9trn fiscal stimulus plan could be only the prelude to even more lavish infrastructure spending. On the monetary side, the US Federal Reserve continues “to buy $120bn of financial assets each month” with printed money.
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
The UK outlook is equally inflationary, says David Smith in The Sunday Times. The Bank of England’s survey of public inflation attitudes shows the average Briton anticipates inflation of 2.7% in the coming year. Nearly one-fifth are bracing for price hikes of 5% or more. That wouldn’t be unprecedented: UK inflation hit 5.2% in September 2011 during the post-financial crisis recovery phase. There is no question that inflation is heading higher, it is “merely a question of degree”.
Fed up with easy money
It’s true that the US is heading for a burst of inflation, says The Economist, but that is what the Fed is for: for all the brouhaha about it going soft on inflation, its mandate still requires it to hike interest rates if inflation runs too hot for too long. Don’t count on it, says Justin Lahart in The Wall Street Journal. The Fed will regard any post-pandemic inflation bump as temporary, the result of a transient rush of consumers towards restaurants and holiday resorts. It is unlikely to act before there is evidence that consumers’ expectations of higher inflation have become “ingrained”, which won’t happen quickly. “The economy could run hot for a while before anybody is worried enough to reach for the thermostat”.
There are good reasons to think the Fed will be slow to react, says Eoin Treacy of Fullertreacymoney.com. More than 17% of all US companies are “categorised as zombies”: companies that rely on cheap finance to stay afloat. Interest-rate hikes would cause mass bankruptcies, so “there is just no way the Federal Reserve” can tighten monetary policy when push comes to shove. That means that the dollar is heading lower and global markets beyond America are poised to outperform. The reflation trade has much further to run.
-
Half of UK homeowners will need to tap housing wealth to pay for retirementUnlocking property wealth could inject £21 billion each year into UK economy by 2040, according to new research
-
When will M&S take online orders again?Shoppers have not been able to place orders on the M&S website for more than two weeks, following a cyberattack. Meanwhile, the retailer’s share price has plummeted by 15%. When will things get back to normal?
-
'Rachel Reeves' plan to force pension funds into UK assets won't work'Opinion Hustling pension fund cash into British assets sounds like a good idea. It would be better to make Britain an attractive place to invest, says Matthew Lynn
-
Supersonic travel: How China could 'leapfrog' US and Europe's commercial aviation industryOpinion Innovation in commercial aviation has been stuck for 60 years. A commercial supersonic jet might be back on the market soon, but will China get there first?
-
How British businesses can tackle Trump's tariffsThe majority of British businesses are likely to take a hit from the chaos caused by Trump’s tariffs to reorder global trade. Companies in the firing line face some difficult decisions, says David Prosser
-
Trump wants to colonise Mars – will it happen?Donald Trump wants to plant the US flag on Mars. Could humans really live there?
-
Why are energy bills so expensive in the UK?Electricity bills in the UK are higher than in any comparable rich country. Some blame the net-zero zealotry of the government for that. What is really to blame for high energy bills?
-
Will Putin invade Europe? Why investors know Russia is a paper tigerOpinion Markets are right to ignore talk of Putin invading Europe, says Max King.
-
Why French far-right leader Marine Le Pen has been banned from running for officeMarine Le Pen, presidential candidate and leader of France's right-wing National Rally party, has been barred from standing by the country's judges.
-
Five years on: what did Covid cost us?We’re still counting the costs of the global coronavirus pandemic – and governments’ responses. What did we learn?
