The residents of the west London apartment block I live in used to laugh when the energy bill arrived.
It is a bill split between the 66 residents of the block and so came to a nominal amount each month, with the admin fee always larger than the cost of the services.
But in December, something changed. The bill more than doubled in size for most residents. Now they noticed it enough to set the communal WhatsApp group ablaze, and it prompted them to notice how much the prices of other small ticket items are also rising.
Inflation has arrived, but is it here to stay, and is it telling us about the economic prospects of clients, and the outlook for markets?
In 2021, UK CPI inflation rose from 0.7 per cent in January to more than 5 per cent in December, considerably above the Bank of England’s long-term target of 2 per cent.
Luke Bartholomew, senior economist at Arbdn, says: “Inflation has proved to be less transitory than expected. I think we all knew it was coming as economies reopened, but we have been surprised by how much it has risen, and how long it has lasted. It has fundamentally changed the analysis.”
James Carrick, global economist at Legal and General Investment Management, says the UK has effectively had two temporary supply side shocks that have generated rapid inflation: Brexit and the pandemic.
Brexit contributed to labour shortages and the pandemic resulted in large parts of the economy shutting down, which have then taken time to increase production swiftly enough to meet the rising demand as economies rapidly opened.
Carrick says that while the impact of both of those shocks may be temporary, “the problem is with people’s future expectations of inflation. If people see a series of temporary events, they start to act as though it’s permanent”.
While the spike in inflation has been broad, based across the developed economies, inflation in the US has been higher than in the UK, and in the UK it has been higher than in continental Europe.
Gero Jung, chief economist at Mirabaud Asset Management, says US inflation is higher because the country’s government spent vast sums on stimulus, including sending cheques directly to citizens, whereas in the Eurozone government spending was much lower, with the UK “between the two”.
He adds: "In the UK you also had Brexit. In the US the issue seems to be around rental costs and used car prices. One of the things to note is that core inflation is high in the US, and core inflation strips out the most volatile items, so is an indicator of the medium-term outlook."
If the inflation spike in the UK and Europe is partly the result of higher energy prices, in the US this is less of a factor, according to Jung.
