HAMISH MCRAE: Inflation tiger may escape its cage

HAMISH MCRAE: None of us know whether the hump in inflation is just that – a hump – or whether it is becoming embedded

If you go out for a drink or a meal this week, do you expect the prices to be higher or lower than before the lockdowns? We all know the answer to that – just as we know that house prices are 8 per cent higher than a year ago. 

What none of us know, though, is whether the hump in inflation that has already come through in property prices and is starting to show in day-to-day goods and services is just that – a hump – or whether it is becoming embedded. 

Fears of rising inflation – and, at one remove, the increases in interest rates that the central banks will have to make if it does take off – swept across the markets last week. 

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At the moment this is mostly an American phenomenon, because the US economy is racing out of the lockdowns faster than the UK and Europe. Consumer prices were up 4.2 per cent year-on-year in April, the largest increase since 2008, and the median house prices were up 17.2 per cent in March. 

Here, perhaps because we are only just coming out of the lockdowns, the numbers are much lower. 

Consumer prices were up only 1 per cent in March, and house prices up 8.6 per cent in February on the ONS tally. We will get updates this week. 

Meanwhile, let’s admit to ourselves that while a strong housing market may have a feel-good effect for homeowners, that sort of increase in housing costs is not sustainable. 

In any case, we are affected by what goes on in America. 

The falls in prices of high-tech stocks swept across the Atlantic, pulling down share prices here even though we don’t have a large high-tech sector. 

The links might seem tenuous and they are. Why should higher US inflation hit high-tech companies more than regular ones? And since equities, unlike bonds, do give some protection against inflation, surely they should be a better buy, not a worse one? 

But this was one of those weeks where reason gave way to emotion. Investors became frightened that the long bull market was coming to an end and the thing that would end it was inflation. 

So they started selling. The price of more or less everything dipped, and the more speculative the investment, the deeper the dip. Tesla shares were down from $672 to $590 on the week. 

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