An era of high inflation has arrived

In recent weeks investors had started to bet on signs that inflation may be peaking – but we’re in a new economic age. Expect high inflation to be here for some time to come.

In recent weeks investors had started to bet on “firm signs that the inflationary peak is in sight”, says Nils Pratley in The Guardian. “We’re not there yet.” Annual US inflation hit 9.1% in June, the highest level since 1981. The price rises were driven by soaring energy prices, up 41.6%, the biggest jump since April 1980. Annual rises in food costs, up 10.4%, and shelter, up 5.6%, also registered new multi-decade highs. UK consumer price inflation hit a new 40-year high of 9.4% last month.

Central banks will keep on tightening

The inflationary pot “just keeps bubbling over”, says Danni Hewson of AJ Bell. Markets expect the Federal Reserve to raise interest rates by 0.75 percentage points later this month. Analysts also think the Bank of England will raise rates by half a percentage point next month. You might feel like you’ve heard this one before, but there are “signs that an inflation peak might finally have begun to arrive” as it’s “clear things are cooling off” in commodity markets.

US pump prices have fallen back in recent weeks thanks to lower oil prices, says Justin Lahart in The Wall Street Journal. “The S&P GSCI agriculture index, which includes crops such as corn and cocoa, has fallen by a quarter since its May peak”. The industrial metals index is down by a third. Still, annual core inflation – which strips out food and energy prices – is still a worryingly elevated 5.9%.

With the US labour market firing on all cylinders, policymakers may well decide that “rising wages could put lasting upward pressure on prices”, causing them to press ahead with interest rate hikes.

A new economic age

The latest inflation figures are more bad news for US president Joe Biden, says Samira Hussain for the BBC. “The real value of American hourly earnings has dropped faster than at any time since the 1980s.” Unhappy voters may punish the Democrats at November’s mid-term elections.

Biden will have to pin his hopes on data suggesting that so far “US consumers are bending but not breaking under the weight of rising interest rates and higher prices”, says the Financial Times. American retail sales rose 1% last month, while strong job creation is keeping unemployment down at 3.6%.

Still, signs of “evident strain” among poorer households are emerging. During the pandemic, US personal savings rates spiked above 30%. That number has since tumbled below 6%, the lowest level since 2013. Whatever central bankers do, history suggests that larger “tectonic forces” herald structural inflation ahead, says Stephen Mihm on Bloomberg.

The past four decades of disinflation were driven fundamentally by globalisation – cheap Chinese labour and fierce international competition kept prices low. Similarly, mild inflation was seen between 1870 and 1914, a previous period of globalisation that was ended by conflict between the great powers.

Between Donald Trump’s trade wars, Brexit trade barriers, pandemic-ridden supply chains and the invasion of Ukraine, recent events have thrown “one wrench after another into the carefully calibrated global economic machinery”. Eras of low inflation “don’t last forever”.

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