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

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.

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 Château 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.