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ALEX BRUMMER: Inflation rears its head

Are central banks in danger of releasing the inflation genie? That is the prevailing view on Wall Street where rising concern about President Biden’s $5trillion of fiscal largesse, and rising, and the unwillingness of the Federal Reserve to put the brakes on, have unleashed anxiety.

Fears of an inflation surge are reinforced by consumer prices data from the US showing year-on-year prices up 4.2 per cent in April, the biggest jump since September 2008.

Inflation risk was the main factor behind this week’s retreat from frothy tech stocks. US Treasury markets tell their own story: the yield on the trend-setting, ten-year bond surged to 1.65 per cent, which is out of kilter with the official rates at 0.25 per cent.

President Biden’s $5trillion of fiscal largesse, and rising, and the unwillingness of the Federal Reserve to put the brakes on, have unleashed anxiety on Wall Street

The US does not necessarily drive the British economy but it is closely connected through trade and finance.

The lone voice of the Bank of England’s departing chief economist, Andrew Haldane, writing in the Mail today, could gain some traction. 

He is concerned about the scale of Britain’s £1trillion of bond-buying since the financial crisis, with almost half in the pandemic. 

He wants to see the Bank ‘throttling back’ and recently voted for a £50billion cut in quantitative easing.

As the world emerges from Covid, demand is surging and supply bottlenecks are putting upward pressure on prices. 

The oil price, which fuelled the great inflation of the 1970s, is heading up and stands at $60 a barrel. Other commodity prices, from agriculture to steel, are climbing. A shortage of semi-conductors is driving stronger prices.

Inflation doves argue that central banks should disregard temporary factors and disruption to supply chains. Technology means the longer-term trend of below-target inflation will return.

The elephant in the room is quantitative easing (QE). In the wake of the financial crisis, Western governments continued to keep a tight grip on fiscal policy and let monetary policy rip, to buoy output.

In the pandemic the accelerator has been hard down on government spending and cash infusions.

This has been terrific in keeping the jobless rate low in the UK and elsewhere but there is little certainty on the inflationary impact of a ‘black box’ policy. In Britain, bond prices remain subdued with the ten-year gilt yield at just 0.83 per cent.

The message from across the Atlantic is that inflation and higher interest rates could be coming down the pike.

Whisky galore

Johnnie Walker whisky group Diageo and catering giant Compass should both benefit from the reopening of the global economy.

Diageo’s premium brands came back strongly last year and in North America tequila and bourbon are driving growth.

With Diageo projecting profits growth of 14 per cent in the current year, chief executive Ivan Menezes has restarted the huge £4.5billion share buyback and special dividend plan, with a pledge to distribute £1billion by the end of next year. 

Share buybacks are tax-efficient for investors and helped drive the shares up more than 3 per cent.

Recovery is tougher for Compass boss Dominic Blakemore. Revenues are on the way back and he hopes the return of live events – from the Brits to baseball in the US – will bring hospitality surging back.

The bigger challenge is hybrid working. The big US banks are bringing people back to the City and Wall Street. 

But the return to the office is going to be stuttering and Blakemore is working on the assumption that the office working shift will come down from 4.5 days a week to 3/3.5 days a week.

It is countering the impact by bolstering ‘dark’ kitchens and direct deliveries, using online menus, to the office or desk at home. Finances are stretched but Blakemore is seeking to drive margins, hit by the pandemic, upwards.

He will be sampling his own catering, having won a seat in the ballot for Saturday’s FA Cup final.

How fortunate is that?

Hot chips

Alphawave is ignoring the current downer on tech in the US, and ploughing ahead with its London float at 410p, placing a £3.2billion value on the company.

It is counting on its ‘deep tech’ model, of licensing smart chips, to justify the pricing. It helps that it has JP Morgan and fund managers Janus Henderson in its corner.

Courageous!

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