A transitory respite from inflation

UK consumer prices rose by 2% year-on-year in July – less than expected. And in the US, month-on-month inflation fell to 0.5%, down from 0.9% in June. But this respite could be short-lived.

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.  

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.” 

Recommended

Cryptocurrency roundup: Putin backs crypto-mining, and spoof McDonald’s coin takes off
Bitcoin & crypto

Cryptocurrency roundup: Putin backs crypto-mining, and spoof McDonald’s coin takes off

Saloni Sardana looks at the cryptocurrency stories that caught our eye this week.
28 Jan 2022
Are recession fears justified? Maybe it’s time to look on the bright side
Economy

Are recession fears justified? Maybe it’s time to look on the bright side

There's a lot to feel nervous about right now, and many people are worrying about an impending recession. But it's by no means certain, says John Step…
28 Jan 2022
Making money is about to get much harder
Investment strategy

Making money is about to get much harder

Soaring inflation, geopolitical risk, bubbly stockmarkets - getting a return on your investment is going to get much more difficult – but not impossib…
28 Jan 2022
How to invest in the chipmakers fixing the semiconductor shortage
Share tips

How to invest in the chipmakers fixing the semiconductor shortage

Last year’s chip crunch brought home how dependent the world is on these tiny pieces of silicon. Chipmakers are rushing to build new factories. Will t…
28 Jan 2022

Most Popular

Amazon halts plans to ban UK Visa credit card payments
Personal finance

Amazon halts plans to ban UK Visa credit card payments

Amazon has said that it is to shelve its proposed ban on UK customers making payments with Visa credit cards.
17 Jan 2022
Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Temple Bar’s Ian Lance and Nick Purves: the essence of value investing
Investment strategy

Temple Bar’s Ian Lance and Nick Purves: the essence of value investing

Ian Lance and Nick Purves of the Temple Bar investment trust explain the essence of “value investing” – buying something for less than its intrinsic v…
14 Jan 2022