“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.
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
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.
-
Will NS&I boost Premium Bonds prize fund rate? Why it could rise soonNS&I now has a net financing target of £13 billion for the 2025/26 financial year
-
Autumn Budget quiz: How closely were you following Rachel Reeves’s tax-raising speech?Quiz Rachel Reeves announced a slew of new tax hikes in the Autumn Budget, impacting almost every taxpayer in the UK. How closely were you following the fiscal event?
-
Chen Zhi: the kingpin of a global conspiracyChen Zhi appeared to be a business prodigy investing in everything from real estate to airlines. Prosecutors allege he is the head of something more sinister
-
Canada will be a winner in this new era of deglobalisation and populismGreg Eckel, portfolio manager at Canadian General Investments, selects three Canadian stocks
-
Jim O’Neill on nearly 25 years of the BRICSJim O’Neill, who coined the acronym BRICS in 2001, tells MoneyWeek how the group is progressing
-
Build or innovate? How to solve the productivity puzzleOpinion There are two main schools of thought when it comes to solving the productivity puzzle, says David C. Stevenson
-
More clouds gather over renewable energy trusts – is there any hope for the sector?The outlook for renewable energy trusts has gone from bad to worse this year, with the industry being caught in a 'perfect storm'
-
Should ISA investors be forced to hold UK shares?The UK government would like ISA investors to hold more UK stocks – but many of us are already overexposed
-
Why Scotland's proposed government bonds are a terrible investmentOpinion Politicians in Scotland pushing for “kilts” think it will strengthen the case for independence and boost financial credibility. It's more likely to backfire
-
How Germany became the new sick man of EuropeFriedrich Merz, Germany's Keir Starmer, seems unable to tackle the deep-seated economic problems the country is facing. What happens next?
