IInflation is the scary word in global financial markets, and US data last week was far from reassuring. The world’s largest economy reported inflation of 5% in May, down from 4.2% in April. It is also on the move in the UK, doubling to 1.5% in April, its highest level since the pandemic began in March 2020.
From New York and Tokyo to the City of London, traders are obsessed with likely price movements and the reaction of central banks. Square Mile-based economists say their clients aren’t asking for much else when they ask which way the financial wind is blowing.
Recent interventions of the former Governor of the Bank of England Lord King and former US Treasury adviser Larry Summers fueled the debate.
Both warn that an inflationary spiral could soon set in and, worse yet, trigger a sense of fear among consumers and businesses, who will come to believe that high and rising prices are the norm. A rise in prices also opens the prospect of offsetting interest rate hikes, which bodes a serious shock to investors and households long accustomed to cheap money.
While all eyes are on the United States, Britain’s economic reboot following the easing of Covid-19 restrictions is also seen as fueling the inflationary fire. Figures last Friday showed that in April Britain’s GDP grew for the third consecutive month – up 2.3% – signaling that a solid recovery is underway.
One of the reasons for this intense anxiety is the apparent nonchalance of central bank policymakers. In particular, the US Federal Reserve has refined its target of achieving maximum stability in employment and prices: it has indicated that it will allow inflation to exceed its target of 2% in the medium term if unemployment and low wage increases remain a problem.
The Bank of England has maintained a more traditional outlook, saying it is monitoring inflation closely and will react to bring it down to the 2% target over the medium term.
However, the markets seem to believe that this difference is only semantics and that all central banks now care less about inflation than about a strong recovery, even if that translates into a prolonged period of high inflation.
While outgoing Bank of England chief economist Andy Haldane has sided with King and Summers, all of his Threadneedle Street colleagues are sitting across the fence, if their speeches and comments at the hearings of the select parliamentary committee are arbitrary. guide.
They dismiss concerns about inflation and say that where rising prices are currently an important feature, it will be short-lived.
Over the past few weeks, they’ve been right: most commodity prices have fallen from recent highs. Wood prices have fallen 30%, while wheat, iron ore and semiconductors are nearly 15% lower, according to BCA Research. The price of copper, as well as that of other industrial metals, is also down, albeit 5% more modestly.
Only oil is on the rise – just like in 2011, when an increase to over $ 100 a barrel of Brent crude almost single-handedly pushed UK inflation to 5%. Later, the price of oil fell, bringing UK inflation to zero.
As many economists have pointed out, greater forces are at play to keep prices stable. The main one is automation. Since the early years of this century and the spread of the Internet, employers have laid off white-collar workers, ignored unions, and hired more and more people on short-term contracts.
This trend has eroded the ability of workers to raise wages. The 2008 bank crash made a bad situation worse. The workers were shocked and fearful of changing jobs, let alone asking for a pay rise.
Right now, employers in a few industries affected by skills shortages are offering bonuses and tuition fees, but there is no indication that annual wage increases are accelerating. Covid is going to change a lot of things, but the trend – seen for over a decade now – of low wage increases and low inflation does not appear to be part of it.
Drahi makes the connection at BT
Telecom billionaire Patrick Drahi has an investment strategy that typically follows a pattern: spot an undervalued target, take control, cut costs, and part with blue chip assets. But his decision to take a 12.1% stake in BT, making Drahi its largest shareholder, marks a departure from a plan that has brought him huge profits for more than two decades.
Philip Jansen, managing director of BT, would fully agree with Drahi’s assessment that the company is undervalued. He could have acquired his stake for almost half of the £ 2.2bn he paid if he had jumped last summer, when BT shares hit their lowest level in 11 years – a time when investors couldn’t see its proposed £ 15bn investment in next-gen broadband. profitable.
But Drahi is playing the long game, making it clear that he supports management and strategy to reap huge returns as the winner of the race to roll out fiber-optic broadband across the UK. It is no coincidence that he rushed after the regulator Ofcom announced a series of financial incentives to help operators recover their deployment costs, and the government’s decision to introduce tax breaks on capital investments.
Previously an embarrassing laggard in the high-fiber world, BT’s Openreach is growing at a good pace and will reach 25 million homes by the end of 2026. And Jansen is already implementing a painful $ 2 billion cost-cutting program. pounds, including stripping over 13,000 jobs and reducing BT’s physical footprint from 300 to 30 locations across the UK.
Drahi says he is not considering a takeover, and in any case the new National Security and Investment Law, which gives the government the power to block takeovers of companies involved in critical infrastructure, would likely thwart any initiative in this direction. But if BT wins the broadband race, analysts believe Openreach alone could be worth as much as £ 30bn – and BT, currently valued at £ 19bn, had a 2.5x market cap. higher than just six years ago. If BT can deliver, Drahi will add significantly to his fortune of almost £ 9bn.
It’s time to give the airlines a break
A familiar cry for help rang out this week from the beleaguered aviation industry, still hoping in vain for the tailor-made aid package carelessly promised by Chancellor Sunak back in the days when Covid barely landed on these shores.
As the biggest airlines took out billions in loans and airports were promised up to £ 8million each in government aid, all were hopeful that survival rations would not be needed by now. Instead, the industry is prepared for another bleak summer without travel.
Hopes that the meager green list of permitted holiday destinations would take in Europe have evaporated with the fiasco of Portugal’s sudden withdrawal, an echo of the uncertainty and U-turns of summer 2020. After the supposed engagement of not one but two government-led travel task forces, with ethereal promises of transparency and a “watch list” of destinations, airline executives could be forgiven for feeling misled by Grant Shapps.
Shapps, however, has pointed out £ 7.2bn in aid to the sector – the vast majority in the form of loans and holidays – and must feel that the most doomsday predictions have not come true: only Flybe, who suffers for a long time no longer. Bailing out airlines that have wealthy shareholders is not an obvious choice to “upgrade” or to move the decarbonization agenda forward. But ONS data confirms that the Covid slowdown has hit aviation much harder than most industries, and ordinary employees have paid the price. A commitment to extend leave for airlines unable to trade could at least secure more skilled jobs.
The point is, demand for flights remains strong: as the Prime Minister noted at the G7 on Friday, it made a huge difference to meet your peers face to face. The UK will need its premier aviation industry again – for once, for real. The government should not be forced to give it long-term tax breaks, but the industry deserves more consistency and attention than ministers have yet shown.