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.”
-
Should you invest in UK equities?The FTSE 100 hit a record high this week, but UK equities remain unloved and undervalued compared to their global and US peers. Should you snap them up at a discount?
-
State pension errors: DWP urged to check for mistakes among divorced peopleFormer pensions minister Steve Webb says there are a high number of divorced women on low state pensions. Now MPs want the DWP to check if there were any errors in “potentially underpaying men and women who are divorced”.
-
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.
-
The end of China’s boomLike the US, China too got fat on fake money. Now, China's doom is not far away.
-
What is the future of Royal Mail in the UK?With fewer of us sending letters and parcels, the Royal Mail is finding dealing with the nation’s post is an increasingly unprofitable and costly business.
-
What's the secret of Manolo Blahnik's success?Fashion maestro Manolo Blahnik shows little sign of slowing down at 81, and his company notched up a record financial year in 2022. What is the secret of his success?
-
Michelle Mone's "tough year of pain"Michelle Mone liked to portray herself as a working-class heroine who worked her way to the top through grit and determination. But her pedestal is built on sand.
-
Trevor Milton, the Elon Musk wannabe, is jailed for fraudThe former CEO of Nikola, Trevor Milton, has been found guilty of lying about the development of the company's electric trucks.
-
Directors should think twice before waiving limited liabilityShould small-business directors ever provide a personal guarantee in return for bank finance?
-
Why Russia's economy is doing better than predictedSanctions were supposed to strangle Russia’s economy, but it seems to be thriving. What’s going on?
