This inflation surge is definitely not transitory

“The inflation numbers are undeniable”, says John Authers on Bloomberg. US consumer prices rose by 5.4% year-on-year in September, a return to the 13-year highs seen in summer as the economy reopened. “There’s no longer [a] way to dismiss this inflation... as merely transitory”.

US inflation stays hot

US core inflation, a measure that strips out volatile food and energy prices, rose by 4% year-on-year. Inflation has been driven by a tight supply of goods such as microchips as well as shortages of workers, says Neil Irwin in The New York Times. There are also reports of “shadow inflation”, where companies cut back on product ranges, or the size of goods (known as “shrinkflation”), instead of raising prices.

Policymakers have been betting that inflation will cool “substantially” over the coming year, says Justin Lahart in The Wall Street Journal. The hope is that a receding pandemic and a global supply-chain recovery will consign this inflationary spike to the history books. Yet that clearly still isn’t happening. Some will point to the disruption the Delta variant of Covid-19 has caused to Southeast Asian factories and supply chains, but it is becoming clear that though the pandemic will end at some point, its economic effects could last much longer than once anticipated.

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A UK interest-rate rise?

In Britain, Bank of England policymakers have been dropping increasingly heavy hints that they could raise interest rates before the end of the year, sending yields on two-year government bonds up to a two-year high. Last month’s annual UK CPI inflation figure, 3.1%, is still far above the 2% target. Many traders expect an interest-rate rise from 0.1% to 0.25% in the coming months.

“The signposts all seem to be pointing to a November rate rise,” says Danni Hewson of AJ Bell. Inflation is supposed to be like “Goldilocks’ porridge”, but “there’s no guarantee that by turning the interest-rate dial the Bank of England can coax out an inflationary environment that is neither too hot nor too cold.” A “rapidly closing window” of ultra-low rates could also inspire renewed frenzy in the housing market.

“The UK economy is experiencing a taste of stagflation,” says a note from Capital Economics. The near-term GDP outlook is weakening and labour shortages are more acute in the UK than in the eurozone. We’re not heading back to a full-scale repeat of the 1970s, but the next six months will be difficult, at least until inflation peaks at about 5% next April.

There is no guarantee that inflation will moderate after next spring, says Roger Bootle in The Daily Telegraph. True, coronavirus-induced distortions will be washing out of the data by then. But the economy will face new challenges from higher labour costs (national insurance is rising) to the hangover from lavish quantitative easing, which means consumers still have a lot of cash in the bank ready to spend. “The time has come for the Bank to send a clear signal that it will not allow higher inflation to become entrenched” by raising rates next month.