We’ve been worrying about a sharp rise in inflation for years – now, we finally have something to worry about. UK inflation (using the consumer price index) is now 5.4%, higher than most economists expected (it always is these days) and the highest for nearly 30 years. The retail prices index (RPI) – once the UK’s main measure – is 7.5%. This is nasty news. Living costs are rising fast. The purchasing power of your savings (on which you will be getting less than 1% in interest) is falling fast. And thanks to the fear that interest rates will soon rise a percentage point or two, large parts of the stockmarket are falling.
There is a view (still!) that this is short term. Sure, we are told, 5.4% is bad, and sure, UK inflation could hit 7% (as in the US) and sure, it isn’t vanishing as fast as central banks promised – but it will still be over by April. We aren’t convinced.
Look at the history of this globally, says Julian Brigden of MI2, and you won’t be either. If you have easy fiscal or easy monetary policy you don’t necessarily get inflation. But “fire both barrels… with some ferocity” and the correlation is “nigh on perfect” (Brigden was talking on the MacroVoices podcast and will be on the MoneyWeek podcast next week).
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
All the signs are that this time is no different. Both monetary and fiscal policies have been ferocious everywhere for years. The result had been that global demand is booming – in the US, says Brigden, total demand for goods is 34% higher than pre-Covid-19. And as for supply, with demand that high, there is no old-normal to go back to. Even if there was, as long as China is insisting on a zero-Covid strategy (with the rolling lockdowns and human rights violations that brings) how can global supply chains work smoothly?
It won’t be over by Christmas
Here's a hint of what that means: input costs for UK producers rose at a rate of 13.5% in December; output prices rose by 9.3%. On wages, so far pay rises have lagged inflation, partly because workers are out of the bargaining habit. With labour in short supply and inflation everyone’s go-to topic of conversation, that’s going to change – Next has already said it expects labour costs to go up by well over 5% this year.
This will not be over by April – or for that matter by Christmas. This means two things. First, interest rates will rise – enough to scare markets (it doesn’t take much) but not enough to halt inflation (this takes a lot). Second, the government will get very worried (illegal boozing aside, nothing destroys a prime minister’s popularity more than falling living standards) and may start intervening in the market – think price caps, for starters.
We hope they don’t go too far. We might have put up with two years of bossy government, but not many people actually like that – see this week's magazine for the million people leaving America’s bossiest states (California and New York) for its least bossy (Texas and Florida) and for our profile of Guillaume Pousaz, an entrepreneur who started his career in California but is now in London.
Either way, with both central banks and governments stressed and too many markets overpriced, this is no time for financial passivity. Check your portfolio to ensure you own some beneficiaries of inflation (we look at the best defence stocks in this week's magazine). Make the most of what tax breaks there are and pay your taxes on time – the interest rate HMRC charges if you don’t is always going to be higher than the interest you will get on cash you keep.
-
Reeves urged to axe stamp duty from UK shares held in an ISAChancellor Rachel Reeves is reportedly considering axing stamp duty from UK shares held in stocks and shares ISAs. What could it mean for your portfolio?
-
Family investment companies explained: how the ultra wealthy shield their money from the taxmanWealthy families are increasingly turning to family investment companies to keep more of their money away from HMRC – but what are these arrangements and how do they work?
-
Yoshiaki Murakami: Japan’s original corporate raiderThe originator of Japanese activism, Yoshiaki Murakami, was disgraced by an insider-trading scandal in 2006. Now, he's back, shaking things up
-
Galliford Try has firm foundations for strong growthBuilder Galliford Try has a finger in a wide range of pies, notably important work in the public sector
-
Card Factory is a stand-out small-cap going cheapIn a digital world, we still value the personal touch. That’s good news for Card Factory, whose unique business model is suited to weather all economic storms
-
How much gold does China have – and how to cash inChina's gold reserves are vastly understated, says Dominic Frisby. So hold gold, overbought or not
-
Debasing Wall Street's new debasement trade ideaThe debasement trade is a catchy and plausible idea, but there’s no sign that markets are alarmed, says Cris Sholto Heaton
-
Europe’s new single stock market is no panaceaOpinion It is hard to see how a single European stock exchange will fix anything. Friedrich Merz is trying his hand at a failed strategy, says Matthew Lynn
-
Should UK schools ban smartphones?The effects of smartphones on young minds are disturbing, with calls for politicians to make school smartphone bans mandatory. Is radical action needed?
-
Are venture-capital trusts worth investing in?Venture-capital trusts are a tax-efficient way to invest in early-stage companies. But are they worth the risk?
