MoneyWeek will turn 21 in early November. It has been a busy couple of decades. We’ve been through the dotcom bubble, two commodities supercycles, the housing bubble, a once-in-a-century financial crisis, and a once-in-a-century pandemic.
We have, in short, been round the block more than a London traffic warden. But one thing we have yet to experience: a nasty bout of inflation. I wonder if we now will.
Not so transitory inflation
John explains in detail why we’re worried in this week's magazine, but the (rapidly rising) bottom line is that all the signs are there. Massive money-printing, which this time is going straight into the system rather than plugging balance-sheet holes in banks as in 2008-2009. Supply bottlenecks, skill shortages and rising raw-materials prices – a combination that points to a wage-price spiral. And, last but not least, central banks and a majority of economists insisting that inflation at multi-year highs is transitory. These would be the same central banks and majority of economists that failed to see the financial crisis coming.
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
It may not be long now before we start to notice the price of items we buy regularly tick up. We all have our own everyday inflation gauges. Mine is the Peppermint Aero. I remember that a bar cost me 22p in 1988. Now it sells for 60p. The Bank of England’s inflation calculator, by far the most interesting thing on the website, suggests that this is right: £22 in 1988 was £60 in 2020. Prices have almost tripled.
The annual average rate since 1988 has been 3.2%, which doesn’t sound too bad. But apply that for 33 years and look what happens. Nudge it up to 5%, and money depreciates much faster. At that rate, £100 shrinks to £36 in 20 years. Inflation is compound interest’s evil twin.
So keep an eye on your favourite cereal, chocolate bar or wine brand. Watch out for “shrinkflation” too. Sometimes the price stays the same but the package gets smaller. I seem to recall that the 1988 Aero bar was a tad longer. I couldn’t swear to it, but I do know for sure that only a few years ago, Cadbury’s used to sell six Creme Eggs in a package; now there are five.
Where does this all lead (beyond Creme Eggs in packs of four)? It’s becoming ever clearer that central banks have no intention of squeezing inflation out of the system. They have subtly raised the bar on what they say they need to see or anticipate from inflation before they stop printing money via quantitative easing or raise interest rates. We hear repeatedly that inflation should be temporary, and they will look through it. They suggest they will tolerate above-target inflation for longer than they have in the past. This spring the US Federal Reserve changed its official inflation target from 2% to an average of 2% “over time”. Two weeks ago the European Central Bank shifted its inflation target upwards too. It now aims to achieve inflation of 2% over the medium term, whereas before it tried to keep inflation below but close to 2%.
Interest rates can’t rise
The direction of travel is clear. The aim is to inflate away the world’s huge debt load – much of it caused by central banks keeping interest rates too low for too long, of course. A big jump in interest rates would cripple the global system.
Bond yields remain historically low, as investors apparently assume that the disinflationary environment of the past 40 years will endure indefinitely. And central banks have bought up a huge chunk of the bond market with printed money, which also keeps yields low. The upshot? We are in for years of yields staying below inflation, which is excellent news for gold. If rates do eventually rise in an environment of out-of-control inflation, it will benefit too. I will be topping up my gold today – just as soon as I finish my 60p Aero.
-
The key October self-assessment tax return deadlines to remember so you can avoid a shock billThere are two important dates for self-assessment taxpayers to remember in October
-
Bank of England’s MPC expected to pause interest rate cutsThe UK economy is weakening, but persistent inflation means experts expect the Bank of England’s Monetary Policy Committee (MPC) to vote against a cut to UK interest rates at this week’s meeting
-
'Ride the recovery in emerging markets': Gustavo Medeiros of Ashmore Group tells MoneyWeekInterview What's the outlook for emerging markets? Gustavo Medeiros, head of research at Ashmore Group, gives his analysis and reviews progress in developing economies
-
'The City's big bet on green finance fails to pay out'Opinion Insurers and banks are backing away from “green finance”, and there is not much sign of the green boom we were promised. That’s a problem for the City
-
Why is English football thriving – and can it last?What has gone so right for English football? The national team has found its feet; the Premier League is swimming in money and profits are soaring
-
Should you invest in Pakistan – the Vietnam of South Asia?Opinion If Pakistan is now serious about reform, it’s time for investors to buy, says Maryam Cockar
-
'Why you must own gold and Bitcoin'Opinion The world is dedollarising, and gold and Bitcoin are the only alternatives. Buy now, says Dominic Frisby
-
'Britain is on the road to nowhere under Labour'Opinion Britain's economy will shake off its torpor and grow robustly, but not under Keir Starmer's leadership, says Max King
-
What are wealth taxes and would they work in Britain?The Treasury is short of cash and mulling over how it can get its hands on more money to plug the gap. Could wealth taxes do the trick?
-
UK bank stocks are no bargain – here's a safer alternativeOpinion Britain's banking sector faces severe political risks. Switch into this global financials trust instead, says Max King
