The inflation narrative has got overheated for now – but it’s inevitable

We learned this morning that the annual UK inflation rate was 0.4% in February – or, at least, so the Office for National Statistics would have you believe.

In the US, meanwhile, it is 1.7%. Who believes this stuff?

Today we talk inflation.

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Inflation is everywhere, except where we measure it

I was having some fun on Twitter yesterday, like so many of us, wasting time that could have been better spent on productive endeavour, posting examples of how there is “no inflation”.

These were all news headlines from just the past few days. Steel prices have more than trebled this year. House prices in the southwest rose by 17% last year, while the first-time buyer in London now needs a deposit of £132,685. “The era of dirt cheap flights is ending,” says CNBC, while British Airways is raising prices for frequent-flyer tickets.

“Food prices are soaring faster than inflation and incomes,” reports Bloomberg. In the UK they have risen by 8.3% since January, says an index compiled for the BBC, while meat and fish are up by 22.3%. Note that this is a global phenomenon with some nations now looking at price caps.

With soaring metals prices, in particular the prices of palladium and rhodium, catalytic converter thefts are on the rise again. There’s a whole account on Twitter dedicated to posting CCTV footage of catalytic converter thieves in action.

Dog theft is on the rise too, by the way, because puppy prices have sky-rocketed. I bought Frodo, my miniature poodle, for £500 ten years ago. Today he would cost me £4,000.

Base metals prices, notably copper, iron, tin and nickel are at multi-year highs. Commodity prices are 68% higher than last year, says the Engineering Record. Wheat, corn, oats, cotton, sugar, soybeans, palm oil – it’s hard to find a grain or soft commodity that isn’t in a runaway bull market. Crude oil went to three-year highs last week (it has since pulled back – more on that in a moment).

There is inflation in financial assets too. Stockmarkets, especially in the US, continue rising. As for gilts and bonds – oof! Say I wanted to secure an annual yield of £50,000. About 12 or 15 years ago, it would have cost me a million quid. Now it costs me ten times that (I’m using round numbers).

Is anything undervalued anymore?

“Start taking profits on this bull market,” a wiser head than me advised on one of the Signal chat groups I find myself in.

“Which bull market?” I asked. “There are so many.”

“Good point. The dodgy one,” came the reply. I don’t know which one is the dodgy one. Is it tech? Is it bitcoin? Is it commodities? Is it government bonds? They are all riding the tide of funny money.

The only places where you could argue that there is actual value to be had is in precious metals – but few seem to care about them now we have “gold 2.0” in the form of bitcoin (for more on the relative merits of bitcoin and gold, see Charlie Morris’ guest column in the forthcoming issue of MoneyWeek).

Value can also be found in value stocks themselves in the real economy, especially in the UK, where the Brexit discount is still on offer. Then again, I’m not even sure the “real economy” exists any more. I haven’t been more than a couple of miles from my house in what seems like months.

As these examples hopefully illustrate, inflation is everywhere you look – except in the government statistics. There is a good reason for that. Governments cannot afford an environment where rates are 3% or 5%. At that point everything breaks down.

“In the UK and US, just over 65% of all government marketable debt is now effectively floating, with the interest bill either tied to inflation or to short term rates”, says Tim Bond of Odey Wealth in his latest report, To Inflation and Beyond.

“Currently, a 1% change in UK or US short-term interest rates would drive a 0.6% of GDP change in government interest expenses. Obviously, the longer QE [quantitative easing] lasts and the more government bonds central banks buy, the greater the increase in this latent sensitivity to interest rate shifts”.

The solution is these dodgy measures of inflation: hallowed economic models that have nothing to do with real life. “High government debt burdens are manageable,” says Bond, “so long as the real interest rate on the debt remains below the real growth rate of the economy”. That then is the game.

The debasement of money is a process that has been going on for decades. In the US since 1971. In the UK since 1914. In Ancient Rome they kept it going for centuries. In 64AD the Emperor Nero reduced the silver purity of the denarius from 98% to 93.5%. Roughly a century after Nero, around 150AD, the purity of silver had been reduced to 83%. By 250AD the silver purity was 50%. By 275AD it was just 5%. By the time of Diocletian, who was emperor from 284AD to 305AD, there was so little silver that the emperor had to resort to price controls.

Don’t hold cash, hold assets. That’s been the way to play it the debasement of our times. Except when things get overblown.

Take some profits – but be prepared for long-term inflation

Every now and then I get one of those little voices at the back of my head. I have tried to learn to listen to him, as he often talks sense, though he tends to get drowned out by the noise. At the moment he is saying – like my buddy on Signal – “take some money off the table”. We may be in an inflationary tide, but when everybody is getting over-excited – things get toppy.

It feels like we are in one of those corrective phases now. After a seemingly unstoppable rally, Brent crude has pulled back ten bucks from $71 a barrel to $60. Other commodities have experienced a similarly jolting cold glass of water to the face. Tech stocks the same.

I think the term is “healthy correction in a bull market”. It feels like we are going into one of those. Cripes, we need it. Everything has just been relentlessly up for what seems like yonks. Maybe it’s just stir craziness on my part, but it feels like the inflation narrative needs to calm down a bit. A healthy correction will do that.

But longer term, governments have got a real problem on their hands keeping a lid on this. As Bond says, household savings are at record highs. In the US they are over $2.2trn (10% of US GDP). The US has stopped measuring M2 as a result. (M2 is a measure of money supply that includes cash, current account deposits and other highly liquid, “near-cash” assets.)

In the UK, household savings are similarly high at 9% of GDP. There is a lot of pent up demand. “A reversion in the household saving rate to its pre-pandemic level is worth 6.8% of GDP,” says Bond and, he calculates, “on the growth side of the equation we have sources of demand equivalent to 26.1% of GDP”

In short, the last time money supply growth was this rampant (after 2008), the money went to places where it was unlikely to be spent – shoring up bank balance sheets and so on. This time around it’s gone into the real economy, which means keeping a lid on inflation, or should I say inflation numbers, is going to be that much harder.

Daylight Robbery – How Tax Shaped The Past And Will Change The Future is now out in paperback at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere.