HAMISH MCRAE: Inflation never goes away – it just sits there, lurking and growling in the background until it has a chance to burst out again
Inflation never goes away. It just sits there, lurking and growling in the background until it has a chance to burst out again. In the past couple of months those growls have become louder. You cannot hear them yet in the official inflation numbers, which show consumer prices up only 0.9 per cent year-on-year here in the UK and 1.7 per cent in the US. But look at what is in the pipeline.
The oil price last autumn was below $40 a barrel. Now it is close to $70 a barrel and that is before most of the world economy opens up. Copper, a key metal for renewable power systems, was trading around $6,000 a ton for most of last year. Now it is $9,000 a ton.
Or take shipping costs. In 2019, before the pandemic, and for most of last year, it cost around $1,500 to ship a 40ft container from Shanghai to Rotterdam – from the world’s largest container port to Europe’s largest port. Now it is more than $8,000.
A work in progress: Inflation never goes away, it just sits there, lurking and growling in the background
Look at chips, semi-conductors, a key component in just about everything electronic right now. The price of a basic 4GB RAM chip was below $2 for most of last year. Now it is $2.75.
Perhaps most troubling of all because it is the form of inflation that hits the poorest people hardest, food prices are climbing. The Food and Agriculture Organization – part of the UN – reports that last month food reached a six-year high, with basics such as sugar and vegetable oils leading the charge.
We can’t know how quickly these pressures will work through to prices in the shops, restaurants, and so on because the world has never been shut down like this in peacetime. In particular, we don’t know what will happen to wages when the jobs return.
They are the largest single cost for most businesses, so if they start climbing, companies have no option but to increase their prices. My guess is that pay will indeed rise quite sharply but there will be a lag as everything struggles to get back to normal. Prices will go up first, then pay will follow.
How high will inflation go? Well, not to the double-digit levels that some of us remember from the 1970s and 1980s, but I would not be surprised if the consumer price index reached 4 per cent by the end of this year. That is way above official forecasts. The official view in the US Federal Reserve and the European Central Bank is that if there is a surge in inflation it will be fleeting.
As for the Bank of England, we will see what they say after the Monetary Policy Committee meeting this coming week. Andy Haldane, chief economist, has said he is worried, but the other MPC members seem less so. My fear is simply that once inflation gets embedded it is extremely hard to scrunch it back down.
There is, of course, one form of inflation that everyone should worry about: what has been happening to house prices. They are really taking off in the US, with average prices up more than 11 per cent last year. Here in the UK they were up 8.5 per cent.
Quite aside from all the social issues this raises – that it is nice for established home-owners, but not so nice for people struggling to find somewhere to live – you cannot expect people to believe that inflation is below 1 per cent when the price of a home has risen by more than eight times that amount.
Back in the 1970s and 1980s, that form of inflation pitted workers against their employers. As prices soared, workers went on strike to try to claw back their losses as the real value of their wages shrank. As a result we had two decades of dreadful labour unrest. The present form of inflation, asset inflation in general and surging home prices in particular, pits the young against the old. The tensions may be less obvious but they are just as divisive – and sometimes more painful if they happen within families.
So what should we try to protect ourselves from the coming bout of inflation? We don’t know when it will come or how serious it will be, but the rules are the same as they were a generation ago. Anyone with savings should make sure these are in assets that give some protection, such as property and shares of solid companies. Keep as little as you need in the bank, and don’t hold bonds except perhaps for index-linked ones. Borrow money but only for investment. Pay off those credit card bills.
This is basic stuff, but worth doing anyway. Perhaps too we should take comfort in Shakespeare’s poem: ‘Crabbed age and youth cannot live together…’ Tension between young and old is not so novel – and we, like the Elizabethans, have to make it work.