What is to blame as consumers face inflation again after years of decline?

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I read the other day that about a third of financial analysts and fund managers had no direct experience of the 2007/8 financial crisis.

The same article depressingly informed me that the majority of the American population had no recollection of the 1987 stock market crash.

Likewise, many commentators and market participants have never experienced an inflationary environment. Some of the smart people I work with have been making some very attractive arguments for some time that the return of inflation is inevitable and will come as a shock to markets and consumers.

This is becoming a more mainstream view and I note that inflation swaps are in high demand by fund managers as a hedge against rising inflation rates in both Europe and the United States.

Inflation has been on the decline for four decades after being strained by vigorous central bank policies in the 1980s, the growth of globalization in the 1990s, and the continued deflationary impact of the Internet in the 1920s. last years.

It is also interesting to note that some of the corrective measures taken after the financial crisis, such as the huge bond buying programs, had no impact on the inflation rate or on consumer prices. All that has happened is that bank reserves and asset values ​​have increased.

However, this concern did not come out of nowhere overnight. It has been bubbling for some time. In fact, the tactics used by central banks to combat the global financial crisis by what is euphemistically called “printing money” (no money is actually “printed”) are in themselves inflationary.

It didn’t matter at first, as excess liquidity was used to support the struggling banking sector, but it matters now. This money is paid into the bank accounts of real people through leave and business support programs. More money in circulation means higher prices – Economy 101.

In addition, commodity prices have risen sharply, pushing up input costs for businesses, encouraging higher prices and thus fueling inflation. Wages are also on the rise for all kinds of reasons, including the lack of immigrant labor from Europe and beyond as well as students working from home.

It is not only the hospitality sector that is struggling to find staff, other sectors as well.

The Road Haulage Association says there is a shortage of 70,000 heavy truck drivers in the UK, vacancies in finance are over 200% higher than at the same time last year and the list is long. In the first quarter of this year, UK wage growth was 4.6%, the fastest increase since 2007, and workers in low-wage sectors are enjoying particularly strong increases with rising annual wages 6.1% in retail trade and 11.3% in leisure.

At the risk of stating the obvious, inflation is eating away at the value of the money in your pocket and your bank account. These days, you’re not even close to being compensated with a good interest rate on your account. An excellent return on your savings would be 0.5%. The UK CPI in May was 2.1%. You are getting poorer reading this.

Central banks say one shouldn’t worry too much about this – the rise in inflation will be temporary, they say. It is fueled by a period of binge drinking as people spend the money they saved during the lockdown.

This is what caused tension in supply chains and pushed up prices (nothing to do with Brexit of course, but that’s a whole different story). So it’s our fault. But don’t worry, it will pass, we are told.

And if it doesn’t, interest rates will rise to combat it. Which means your mortgage payments will go up (an increase in repayment rates from 1% to 2% means your monthly payments will go up by over 10% – sorry) and you will feel even poorer.

A cynic may point out that it is in the best interests of central bankers to look through these inflationary pressures, which they like to say they are doing, lest anyone look too closely at their own role in it. power of this situation.

In the words of legendary Francis Urquhart of House of Cards – “You may think that; I could not comment.

David Clark is an investment manager at Saracen Fund Managers.

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