Why the UK's 2.5% inflation is a big deal
After years of inflation being a financial-assets problem, it is now an “ordinary things” problem too, says Merryn Somerset Webb. But central banks still insist it is transitory.
![Fans in flags outside the London Olympics](https://cdn.mos.cms.futurecdn.net/BddhCxvdCsw2zc7dr4zZ3b-415-80.jpg)
In May, annual inflation in the UK as measured by the CPI (consumer price index) rose to 2.5%. This doesn’t sound very much, and it shouldn’t be much of a shock to regular readers: we’ve been worrying about inflation for some time. But that doesn’t mean it isn’t a big deal. It’s higher than most analysts expected for the third consecutive month (the consensus forecast was 2.2%) and the highest since 2018. It is 25% higher than the Bank of England’s target (2%) and six times higher than it was in February. Note also that our old measure of inflation, the RPI (retail price index), is 3.9%. The problem is not confined to the UK: in the US, CPI is rising at 5.4% a year.
This matters. Central banks still insist it is transitory – the base effects of last year’s falling prices working their way out of the system. But it could easily be more: as Capital Economics notes, in the UK “the rises are bigger than the base arithmetic would suggest which means that genuine price inflation is happening too”. How much? The Bank of England reckons it will top out at 3%. Capital says 4%. Both look low to us, given how much inflation you can see around you. You can see it in labour shortages (next week’s podcast guest Brian Pellegrini says that workers have “repriced their leisure”, so employers have to reprice their work). You can see it in the art market (see this week's magazine for the £8.9m just paid for a Leonardo da Vinci sketch and the near-£3m for a 1970 Patek Philippe watch). You can see it in house prices. You can see it in equity prices – the S&P 500 hit yet another record on Wednesday.
But most importantly of all, after years of inflation being a financial-assets problem (a problem because it exacerbates wealth inequality) it is now an “ordinary things” problem too – for example, in the US, used car prices are up by 45%. In any normal world, interest rates would already be rising. But not in this world. After years of terrible post-financial crisis policy making, the authorities are stuck, as Bill Blain of Shard Capital puts it, between the Scylla of inflation and the Charybdis of a market and house price collapse. They are terrified of the latter so feel they must put up with the former. They won’t act in time to head it off.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
![https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg](https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748-320-80.jpg)
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
You can’t ignore this “monetary disease”. We’ve looked at many ways to deal with it over the last few years. But this week’s podcast with Russell Napier is well worth a listen: despite the extraordinary house price boom, he’d still buy residential property. Another hedge might be commodities – David Stevenson has view on a new fund that might do the trick.
We might also think about what else societies have mentally repriced along with their leisure time. I wonder if it might not be our health. Private GPs and hospitals have seen demand surge. Given the state of the NHS at the moment, there will be many more surges to come, and private healthcare will look increasingly like a good investment. There’s a US idea on this in this week's magazine, but we will look at ways in to the sector in the UK in a future issue.
Finally, for yet another Covid-19 casualty, we look at the insane amount of money floating around the Olympics. The London Olympics cost about £10bn (admittedly small change next to the £14bn-a-month peak furlough cost). But the Tokyo Olympics are coming to more like £19bn. How’s that for inflation?
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
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
-
Skipton launches a retirement bond with monthly income – is it any good?
The building society has launched a new three-year fixed-rate bond for those aged 66 and over. Can it boost your retirement income?
By Katie Williams Published
-
Pensions: 140,000 pensioners to be hit by surprise tax demand
Tens of thousands of pensioners will be written to over the summer because their pensions have gone above the frozen income tax thresholds
By Chris Newlands Published
-
CrowdStrike IT outage: a global meltdown
Millions were affected by the CrowdStrike IT outage recently, which grounded flights and took the news off the air. Was this just a hiccup or a warning of much worse to come?
By Simon Wilson Published
-
Revolut founder Nik Storonsky cashes in – what's next for the fintech billionaire?
Nik Storonsky has shaken up the banking industry with Revolut. He is now preparing a new project that could do the same to the venture capital sector
By Jane Lewis Published
-
Is local production making a comeback?
Companies return production closer to home and shorten their supply chains due to the pandemic and geopolitical turmoil. How should investors react?
By Dr Matthew Partridge Published
-
French election: an unexpected win for the left-wing
The snap French election delivered a stalemate. What does this mean for the country's stability?
By Dr Matthew Partridge Published
-
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?
By Alex Rankine Published
-
Is online anonymity a necessity for economic and political freedom?
Online anonymity can be abused by trolls, but it remains central to our economic and political freedom, says Dominic Frisby
By Dominic Frisby Published
-
Should your business invest in a VoIP phone service?
Here's what you need to know about VOIP (voice over IP) services before landlines go digital in 2025.
By David Prosser Published
-
The end of China’s boom
Like the US, China too got fat on fake money. Now, China's doom is not far away.
By Bill Bonner Published