With prices at all-time highs and shortages abound, co-manager of the Ruffer Investment Company Duncan MacInnes says on the ground experience is instructive, and a once in a generation transition into a world of higher inflation is underway
“A vaccine-led recovery is here, economies are opening up and animal spirits are being unleashed, but the pickup is so fast, messy and distorted that traditional measures are not giving the full picture.
“A year ago, businesses were planning for Armageddon and today some have never had it so good. On the ground experience is instructive: my barber is 50% more expensive; a pint of beer cost me £7.80; I know a builder stockpiling materials worried he can’t get the right kit, and used car prices are at all-time highs.
“Inflation is a psychological phenomenon and the expectation of rising prices leads to rising prices. Companies cannot get staff and wages are being forced up. McDonalds is even paying candidates just to show up for interviews. Shortages are a key sign of inflation and all the while, policymakers are pouring further fuel on the fire. Central bankers tell us this is all transitory, so is this the inflationary denouement?
“Perhaps surprisingly, our answer is a word of caution. When we look at commodities and re-opening stocks, a lot of inflation is now priced in: this is front-page news. Just as today’s inflation numbers benefit from an easy comparison versus lockdown last year, next year’s inflation will require sustained economic momentum to stay up, and with companies scrambling to increase supply, the spike could well be followed by a dip and the transitory crew might have their moment in the sun.
“But what is clear is any relapse in economic growth will be quickly met with more stimulus and more inflationary policies, so we have conviction this current inflationary spurt is the starting gun. Everyone has seen that inflation is not dead and investors have been given a taste of how their portfolios will perform when it comes. The 30-year US Treasury, the world’s risk-free asset, fell 20% in Q1 2021, and the assets which have performed best in the last decade are vulnerable – especially long duration assets like bonds and growth stocks.
“We don’t expect inflation to go up in a straight line, but the direction is clear. A once in a generation transition into a world of higher inflation and inflation volatility is underway.”