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Holly's Blog: What was once going up by 41.9 quadrillion percent?

16 July, 2021

Markets got spooked a bit this week as one of the Bank of England’s bigwigs flagged some warning signals about inflation being more than a temporary post-lockdown blip. The House of Lords economic affairs committee has also waded in, questioning the Bank of England’s continued love affair with low rates and flooding the economy with cheap money.

The Bank of England has a magic inflation number of 2% as its maximum target. Anything above this is a cause of concern. On Wednesday, the Consumer Price Index was published showing inflation at 2.5%.

It’s not just here. US consumer prices jumped up by 5.4% in the twelve month period ending in June. One example contributing factor is the surging cost of used cars and trucks. There’s a double whammy of strong pent-up demand (“I wanna new car”) and supply shortages (“sorry doll, there are none left”) in the new car market.

Don’t panic folks!

Let’s keep it in perspective. The Post-World War II hyperinflation recorded in July 1946 in Hungary is the most extreme monthly inflation rate ever recorded, with the slightly bonkers number of 41.9 quadrillion percent. I think that’s 41,900,000,000,000,000% but with that many 0s I don’t think one or two more make much difference ;0) We can agree that this is A LOT.

According to the BBC, in Zimbabwe in 2008, prices would double every 24.7 hours. So by the time you read this blog on Friday afternoon, my morning coffee would have gone from £2.20 to £3.30. Even more mind-bending in a contactless-less world!

So whilst 2.5% may not sound that bad compared to these extremes, markets don’t like it. Savers don’t like it. (Come in, Madam! Our interest rates are 0.1% and so our valued customers are going backwards by 2.5% minus 0.1% every year! You’re welcome!) And as for this continued quantitative easing and the impact it has on prices – just ask anyone not yet on the housing ladder what they think.

What’s driving it?

Given the news that half a million people were told to self-isolate this week in celebration of ‘Freedom Day’, it’s pretty obvious that staff shortages are a problem. Redundancies have fallen. Fewer available people, more demand = higher wages. Higher wages = higher prices. Manufacturing and services prices are on the rise. And there’s still a post-lockdown spending glee. Even I dragged my tired old post-Coviddy self out on Wednesday night and spent £80 on food and wine with the gals. I will not disclose the ratio of food:wine but it was bloody great. I figured if I was going to spend Thursday with the relentless headache and feeling knackered, I may as well have some fun earning it!

What might happen?

Ultimately the Bank of England use interest rates as either the required extra caffeine shot or chill pill for the economy. At the moment there is lots of cheap money swilling around the system and at some point they will worry about inflation more than they worry about economic slowdown, tighten up and increase interest rates.

If interest rates go up, it’s more expensive for companies to get capital to hire people and make stuff so their profits can fall. And punters like us borrow less, and hence spend less. That’s a simplistic view of why the FTSE 100 had a bad day yesterday. Inflation = eventually higher interest rates = less activity and more expensive activity = lower corporate profits.

A final note on crypto

The financial regulator (the FCA) published its business plan this week, sharing its focus and goals. A key concern is unregulated cryptocurrency, with the watchdog echoing its opinion that anyone who touches this should be prepared to lose all their money.

Next Tuesday at 6pm we are running a webinar on crypto, sponsored by trading platform eToro). I’ll be joined by one of their ‘guru' traders and digital currencies expert Quinn Markwith. I have so many questions and can’t wait to hear their take on this still mysterious ‘asset class’ to me. Sign up here to join us or to access later on demand.

Is it all a ruse to increase the wealth of an exploitative cartel of a shady few rich blokes, operating in a world of tax avoidance and limited regulatory oversight, who promote a get rich quick narrative to exploit naïve impatient optimists? Or is it an inevitable consequence of the blockchain and general digital development, a radical change which is here to stay, and an exciting new asset class which will grow from misunderstood thing for the few to a fundamental part of all our portfolios? I will know more after 6pm on Tuesday!

Have a lovely weekend everyone. Looks like it will finally be time to reach for the suncream and feel the rays on our faces. Hooray.