Inflation

The horror! Yesterday we discovered that UK economic output — as measured by GDP — fell by 1.6 per cent in the first quarter of the year, 0.1 per cent worse than the 1.5 per cent originally reported. This is practically a rounding error. To put it in context, as recently as March the Office for Budget Responsibility, which crunches the numbers for the Chancellor, was forecasting that GDP would fall by 3.8 per cent in Q1. As well as still beating these gloomy expectations, the latest figures are also old news. But if anything, the detail is encouraging. The downward revision to headline GDP was largely due to a bigger decline in consumer spending than first thought, mirrored by an upward revision to household saving.

The economy is growing at a blistering pace, and likely to recover all its Covid losses by the autumn. Labour shortages are emerging across a range of industries, as the supply of Eastern European workers dries up. Prices are starting to edge upwards, house prices are soaring, and commodities are getting more expensive. But, hey, it is probably a good moment to keep the printing presses rolling and pump plenty of freshly minted pounds into the economy. The Bank of England’s Monetary Policy Committee (MPC) decided not just to keep base rates at 0.1 per cent today – that was largely expected – but also to maintain its programme of quantitative easing at £875 billion. And it may well have blown its chance to nip inflation in the bud before it starts to escalate.

The signs were there for all to see — pubs, restaurants, hairdressers and so on all pushing up their prices. Businesses have to make a profit while observing social distancing, dealing with soaring fuel prices and fast-accelerating wages. Yet the latest inflation figures seem to have caught many people by surprise. The Consumer Prices Index (CPI) is back above the Bank of England’s target at 2.1 per cent. Fears that Brexit would lead to a surge in food prices appear to be unfounded Drill down into the figures and you can see that, while the current level of CPI is not in itself a problem, inflationary pressures are building.

Companies are facing critical shortages of staff. Commodity prices keep spiking upwards. Central banks are printing money on an unprecedented scale, and governments are running deficits of a size that haven’t been seen in peacetime before. What could possibly go wrong?  Well, quite a bit, as it happens. And the departing chief economist of the Bank of England Andy Haldane is completely right to warn that the real risk we face over the next couple of years is not a prolonged slump, but a re-run of the spiralling prices of the 1970s.  To his credit, Haldane was seldom afraid of challenging orthodox views during his time at the Bank. Now that he is leaving, he has become increasingly off-message.

Time is, I fear, running out. Running out, that is, to avoid handing to a small number of multinational corporations our right to buy and sell things. Running out to prevent governments and central banks helping themselves to our savings, by means of negative interest rates. The payments industry is closing in on its target of driving cash out of circulation and instigating cashless payments as the only way of doing business. That, at least, is the conclusion one might reach from reading a report by Worldpay: the Global Payments Report 2021. It claims that cash payments in UK shops in 2020 made up 13.4 per cent of total payments, down from 27.4 per cent in 2019. By 2024, it predicts, they will be down to just 6.9 per cent. By the same year it will be down to just 0.

Is President Joe Biden living up to expectations? It’s hard to say, since the expectations generated on his campaign trail were so murky. Biden made plenty of promises on the stump but only one thing was ever clear: he wasn’t Donald Trump. Beyond that, no one was really certain what iteration of Biden would enter the Oval Office on Inauguration Day. A pragmatic moderate or a progressive ideologue? A return-to-normal steady hand or a malarkey-scourging bomb thrower? The law-and-order author of the PATRIOT Act or the 'Black Lives Matter' anti-racist he suddenly morphed into last summer? Biden was so defined by who he wasn’t that no one ever quite worked out who he was. Now we have our answer. Whatever moderation was once attributed to him has been quickly abandoned.

The vaccines are rolling out. Lockdown is easing, the EU has been forgotten about, and the Labour party has returned to its traditional pastime of plotting furiously against its leader. No one is even talking about wallpaper anymore. Things could hardly be going better for Boris Johnson, and that has been reflected in local election results and in the polls. There is one looming threat, however. The return of inflation. In truth, rising prices have been destroying governments for a hundred years, and it would be complacent to imagine this one will be the exception. President Biden has embarked on a tax, spend and borrowing spree the like of which has not been witnessed before in peacetime As figures out today make clear, prices are starting to rise again.

President Biden wants to nearly double the tax on income from capital gains, currently at 20 percent, to 39.6 percent. Add to that the 3.8 percent Obamacare surcharge and you’re up to 43.4 percent. Many states tax capital gains as well and in 13 of them (plus the District of Columbia) the total tax on capital gains would be over 50 percent with the proposed new federal rate. In California it would be a staggering 56.7 percent. But it gets worse. Unlike the tax on regular income, the capital gains tax is not indexed for inflation. So with long-held assets, much of the gain is illusory. For instance, if you bought an asset in 1971 for $50,000 and sold it this year for $1,000,000, you would owe taxes on a nominal capital gain of $950,000. At 56.

‘We are seeing very substantial inflation,’ the great investor Warren Buffett told shareholders in his master company Berkshire Hathaway at their online annual meeting last weekend. He was talking chiefly about the housebuilding businesses in his port-folio, hit by rising material costs in what he called a ‘red hot’ economic recovery. But his remarks align him on a broader front with jittery bond investors and big-name economists, such as Larry Summers of Harvard, who have fuelled the US ‘inflation scare’. And if it’s coming over there — pessimists whisper — surely it’s coming over here? Maybe, but let’s keep this in perspective. Headline US inflation is 2.