Too much inflation is bad news for asset prices and for living standards. We are now at the point where high inflation is biting into people’s incomes and forcing them to make tougher choices about what they can afford.
Some companies can pass on the full cost increases they are experiencing when paying staff, buying energy and sourcing raw materials because they sell essentials and have strong brands. Others will start to struggle as demand for more discretionary items drops or where their brand is not strong enough to get away with a substantial price rise.
When companies that have in the past grown strongly report their figures, any that show weakening turnover or falling margins stand to be marked down heavily.
The inflation which was building on both sides of the Atlantic from loose policy last year has been boosted by the surge in energy and food prices. The supply interruptions that Covid closures created have been intensified by many countries refusing to buy Russian energy and by the inability of Ukraine to grow and export the large quantities of grains and cooking oils they usually supply.
As a result we have, as expected, seen a further escalation in price rises. Spanish producer inflation hit a startling 46 per cent in March, consumer price rises got close to 10 per cent in the Netherlands and house prices in the US have been leaping by around one-fifth.
I would like to find some bullish news, but we have just lived through another month of falling share indices as markets adjust to the new realities. Once again, the substantial cash in the fund was the best performer — while falling behind price inflation. The value of the inflation-linked bonds, held in anticipation of faster price rises, can still be adversely affected by rising rates even though they are indexed to inflation.
The war in Ukraine rains down death and destruction, forcing the advanced world into tougher action to remove business interests from Russia and to reduce dependence on Russian energy. The inflation of asset prices that markets enjoyed in recent years from low interest rates and plenty of official money printing has been replaced by rising interest rates and an end to money printing in most advanced countries led by the US.
Japan is an exception and the euro area has yet to make the moves now anticipated by markets to end quantitative easing and move to rate rises. China has had a further brush with the Covid virus and has entered another series of damaging lockdowns, leading to more shipping delays and goods shortages.
The central banks are at different stages in their battles to get inflation down. Several of the emerging countries have raised rates a lot to curb the pressures. The Bank of England led the way for advanced countries and the US is now set to catch up with several rate rises. The euro area is way behind where it needs to be, as it still considers when to end the bond buying that has kept rates on the floor for so long. They will now be assisted in their task of getting inflation down by the big hit to real incomes and spending power from inflation in the prices of basic goods.
Central banks traditionally lurch from boom to bust, bringing inflation under control by cooling an economy and often reducing demand so much that it causes a recession. This time ultra-high prices for heating and eating will do some of their work for them.
But they have no easy way out. Do they look in the rear-view mirror at the inflation and apply the monetary brakes more severely, risking recession? Or do they look ahead to see the slowdown that high inflation, more supply disruptions and their monetary tightening so far will bring? That may mean not going too far once they have ended quantitative easing.
The theme of countries making and growing more for themselves was one we highlighted when President Trump challenged China as a trade cheat and has been intensified by lockdown shortages and now by the imperative to remove Russia from business partnerships.
The world is splintering into regional blocs and nations, loosely grouped around the autocrats under China and Russia on the one hand and the democrats and Europe led by the US on the other. These changes will accelerate technology revolutions in artificial intelligence, robotics and digital communications as high-wage countries seek to do for themselves more of the things that had been contracted out to lower wage economies.
The green revolution is still the controlling idea behind much US and European policymaking, but the realities of dear and scarce energy is requiring a detour on the road to net zero. There needs to be more oil, gas and coal for a little longer as the transition is not yet ready to replace them. Less international trade, more subsidies and a home bias will adversely affect world growth and fuel price rises.
I am still watching for when we can start to look through the bad news on inflation, output and company prospects to better times. We are not yet at the point where inflation is falling from highs nor where we can point to an eventual end to rate rises. Cash and caution still helps the fund.
Sir John Redwood is chief global strategist for Charles Stanley. The FT Fund is a dummy portfolio intended to demonstrate how investors can use a wide range of ETFs to gain exposure to global stock markets while keeping down the costs of investing. firstname.lastname@example.org