When does “transitory” inflation “become persistent?” asks The Wall Street Journal. The US Federal Reserve has spent the year insisting that soaring prices are a “transitory” effect caused by reopening. Yet US consumer prices rose by 5.4% in July compared with a year earlier for the second month running. Energy prices are rising. Ordinary workers are being hurt. “Real (after inflation) average hourly earnings have declined for seven consecutive months.” This week we learnt that UK consumer prices rose by 2% year-on-year in July.
Price pressures pause
Some of the data supports the transitory case, says The Economist. Month-on-month US inflation fell to 0.5%, down from 0.9% in June. The inflationary spike has arguably been concentrated in areas stressed by the reopening, such as used cars and airline tickets, which have seen massive demand as people start travelling again. As the economy normalises, the reopening effects should ease. “Airline fares fell slightly, as did the cost of furniture.” Falling bond yields suggest bond markets agree with the Fed.
This respite is itself “transitory”, says Lisa Beilfuss in Barron’s. US politicians are working on spending bills worth a total of $4.5trn. Not all of that will become law, but a great deal probably will. As Barry Knapp of Ironsides Macroeconomics notes, “you have to go back to the 1960s to see such massive fiscal spending during an economic boom”. Loose fiscal and monetary policy during that decade ultimately laid the groundwork for “the Great Inflation of the 1970s”. “Ongoing supply-chain strains and labour market shortages” will also keep prices buoyant, say Augusta Victoria Saraiva and Kyungjin Yoo on Bloomberg. A Bloomberg survey finds that economic “forecasters now expect the consumer price index to remain above 5% on a year-over-year basis at the end of the third quarter” and to stay well above target into next year.
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
An end to QE?
The Fed has “little room for error”, says Vivien Lou Chen for MarketWatch. Inflation can be a self-fulfilling prophecy: if people expect higher prices then they demand bigger pay increases, which in turn drives actual prices higher. The longer high inflation lasts the greater the risk that these expectations will become “deeply embedded”. For now the Fed is debating when and how quickly to scale back its $120bn in monthly asset purchases. Actually shrinking the $8.2trn balance sheet of assets it has already amassed isn’t even “on the radar”.
The Bank of England has been giving clues about how it plans to wind down its own £875bn stock of UK government gilts, says Tommy Stubbington in the Financial Times. “It made the process sound positively serene,” but markets aren’t convinced. Many big investors believe that quantitative easing (QE) is “a thinly veiled scheme to finance the government’s deficit.” Bond markets could take fright if they decide the Bank is withdrawing support too quickly. “Putting the QE juggernaut into reverse” is “likely to be fraught.”
-
Who is the richest person in the world?The top five richest people in the world have a combined net worth of $825 billion. Who takes the crown for the richest person in the world?
-
Top 10 stocks with highest growth over past decade - from Nvidia, Microsoft to Netflix, which companies made you the most money?
We reveal the 10 global companies with the biggest returns since 2013. One firm has posted an astonishing 9,870% return, meaning a £1,000 investment would now be worth almost £82,000.
-
Can Lidiane Jones be Bumble's perfect match?
Dating app Bumble is taking on Lidiane Jones, a well-regarded leader in tech, as its new boss. Can she work her magic in a new arena?
-
UK millennials are worse off than previous generations
The evidence shows that millennials today are getting a raw deal. And, ultimately, that's a political choice.
-
The rise and fall of Sam Bankman-Fried – the “boy wonder of crypto”
Why the fate of Sam Bankman-Fried reminds us to be wary of digital tokens and unregulated financial intermediaries.
-
The jury's out on the AI summit at Bletchley Park
World governments gathered for an AI summit at Bletchley Park in November, but were they too focused on threats at the expense of economic benefits?
-
As a market correction begins, money is on the move.
The force of a market correction is equal and opposite to the delusion that preceded it, so we can imagine that the correction will also be unparalleled.
-
How small businesses can retain staff in a competitive job market
Small businesses are struggling to retain staff and compete against large companies with deep pockets.
-
The French economy's Macron bubble is bursting
Cheap debt and a luxury boom have flattered the French economy. That streak of luck is running out.
-
K-pop hitman Bang Si-hyuk aims to repeat BTS phenomenon
Bang Si-hyuk created the world’s biggest boy band, BTS, making K-pop music a global sensation and himself very rich. Can he repeat the trick with a girl band?
