What's really driving the wine boom – fear of hyperinflation

The price of 'real' assets – everything from commodities to wine – is soaring as the super-rich start to worry about the value of paper money. This could be very bad news in the long run – but in the short run, there is a silver lining to all this spending.

We worry about very high inflation here at Moneyweek. It bothers us that in the UK the RPI is knocking around 5%. It bothers that in much of Asia it is not far off 10%. And we note that the numbers are hotting up in Europe.

You might say that we worry unnecessarily, and that it is quite a leap from 3% and 5% to 15%. But these flips can happen very suddenly. What drives them? Very often it is fear. When people suddenly think that their cash isn't holding its value they rush to get rid of it swapping it for anything with intrinsic value they can lay their hands on. In doing so, they push up the cash prices of real goods and, bingo, they work up their very own inflationary spiral. And as so many policy makers know to their cost, once this has begun it is hard to stop.

So here's the worry: it might, just might be beginning to happen in some places.

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There has been some evidence for a year or two now that the super-duper rich aren't taking any risks with their cash. As quantitative easing (QE) has been pumped up increasing the potential supply of money but not the supply of stuff they've been busy swapping their cash deposits for houses in Mayfair, any old art and expensive bottles of wine.

All those silly articles in the personal finance sections of newspapers about how wine has a great record as an investment? They are nonsense. The price of Chteau Lafite hasn't gone hyperbolic because the yacht-owning classes consider it to have a consistent record as an investment on a par with dividend paying equities. It is rising because they are beginning to hate the feel of fiat money in their pockets. Just having it makes them nervous about their ability to hang on to their real wealth with a money-printing man in charge of the Fed. And quite right too.

However, cash might not be just burning holes in the pockets at the tip of our wealth pyramid any more. CLSA's Russell Napier points to numbers out from HSBC showing that even those with incomes from the £100,000 range up are cutting down on their savings and heading off on spending sprees. According to their survey, those earning between £100,000 and £150,000 intend to save 12% less in 2011 than they did in 2010. Those earning over £150,000 intend to save 6% less. It seems, says HSBC's Richard Brown, that "despite widespread concern over rising unemployment and the VAT rise this month affluent consumers have decided to defer their savings for the time being."

Perhaps this reflects the fact that their taxes have gone up a little and they expect them to go up a lot more. Or perhaps, as commodity prices rise and rise and as the Fed keeps going with QE, they too feel they'd rather buy something that they feel might retain a high percentage of its value, than hang on to cash they know probably won't in the medium term?

The inflationary implications are something to keep an eye on. But there is another implication too: if the middle wealthy are spending more than expected, consumption - and hence growth - might well surprise us all on the upside in 2011.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.