Inflation: compound interest’s evil twin
We're about to see something we've not seen for a while, says Andrew Van Sickle: a nasty bout of inflation.


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.
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
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.
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
-
Norfolk or Norway? Holidays you can afford with different-sized pension pots
Many people look forward to taking more holidays when they retire. But what sort of trips could your pension buy you? We look at the holidays to match different retirement incomes
-
Q&A: Issac Thong – new lead manager of Aberdeen Asian Income Fund
-
Will Donald Trump sack Jerome Powell, the Federal Reserve chief?
It seems clear that Trump would like to sack Jerome Powell if he could only find a constitutional cause. Why, and what would it mean for financial markets?
-
How to use SAYE and SIP schemes to multiply your money
Employers’ savings or share-incentive plans like SAYE and SIP schemes can help top up your pension
-
America’s looming debt crisis could blow up the entire financial system
Opinion Everyone’s trying hard to pretend that America's debt trap doesn’t really matter. It does, says Bill Bonner
-
Where investors can find value now
Opinion Active fund managers and blue chips on both sides of the Atlantic look appealing, says ByteTree’s Charlie Morris
-
Farming isn't for the faint-hearted – there are no profits to harvest
Opinion Farming may look appealing, but turning a profit is extremely hard. No wonder many farmers are attracted to the Sustainable Farming Incentive, says Max King
-
The true nature of economic growth
Opinion The feds making a number go up is one thing; true economic growth is quite another, says Bill Bonner
-
Trump eyes private foundations to raise tax. Will philanthropy decline?
The picture is mixed, but philanthropy on the whole is alive and well, says Simon Wilson
-
'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