Suddenly people are talking about inflation again. A recent study by the US PIRG Education Fund of 750 “essential” items sold on Amazon showed that by December last year, the prices of 409 were up by over 20% from pre-pandemic levels, while 136 had more than doubled.
More significantly, many companies have been reporting cost pressures as global supply chains, transport and energy costs have rebounded sharply. As production interruptions in the West have increased reliance on the East, the cost of shipping containers from Asia to Northern Europe has increased sharply, from about $2,000 in November to more than $9,000 in January, according to the Freightos Baltic Index. Meanwhile, FactSets shows that oil and gas prices have more than doubled from their lows, the London Metal Exchange shows copper is up 70% to an eight-year high and the US front month corn futures show that food prices are rocketing.
Rising prices are signalling that the recovery, when it comes, will look very different and be much more inflationary than anything we have seen for 30 years.
Our view is that the benign conditions we have enjoyed over the last 30 years of rapid global growth, low inflation and high returns on capital are not thanks to central bankers, but largely the result of some very helpful social, political and technological developments which are now going into reverse.
And after a “nobody’s fault” crisis, governments are likely to keep on spending. So, the rebound in both growth and inflation could be much more powerful than expected. In that case, we run the risk of policies which will be dangerously inappropriate.
Why does this matter?
This benign period has provided the perfect conditions for a conventional charity investment portfolio – combining high growth equities with bonds to give both good returns and protection from equity market falls. This ideal combination rested upon low and falling inflation. Financial markets may initially enjoy the rapid real growth. But signs of a return of inflation could be damaging to bonds and growth equities.
Inflation is spreading from asset prices into the real economy, and markets are beginning to price in the implications. Charities should be considering what this environment means for their portfolios now.
Hermione Davies is an investment director at Ruffer
