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Several years ago, my former employer tasked me with writing up a short piece on 1970s inflation. One of the few things I ‘knew’ about the topic was that the primary cause of inflation during the period was the Yom Kippur War and the subsequent Arab oil embargo.
But when reading through various pieces of research on the topic, the sense you got was that economists could not agree on why it had happened at all. Of course, economists not agreeing on a given subject isn’t likely to be news to anyone. What struck me though was the sense that, if we cannot agree on what the prior cause of inflation was post fact, it must have been tremendously difficult to predict when it would end in the midst of it.
Moving on a few decades to the present day, much of 2023 felt as though investors had forecast an end to inflation and rate cuts as the base case scenario. The higher than expected inflation print in the US this week was a sign that this may not end up being the reality. There are also lots of inflationary trends which remain at play.
Take labour disputes as an example. In the UK, many public sector workers – of whom there are over 6m – are demanding wage increases that are far in excess of the rate of inflation. Strike action in the private sector, according to ONS data, meant the number of lost work days was at its highest level, by far, in the last three decades.
Regardless of what you think of this, it is hard to ignore the inflationary implications. The ‘problem’ also appears to be getting worse. The main reason for that is the shortage of labour we are seeing across developed markets.
In the UK the unemployment rate is at its lowest level since the 1970s. Over in the US, the labour market is similarly tight and there is a shortage across various industries, including retail services and construction. Workers are thus in a much better position to strike and employers are not in a strong position to ignore their demands.
Finally there is the risk that Russell Napier, chairman of Witan Investment Trust (WTAN) has highlighted repeatedly, namely that governments may be incentivised to let inflation run, in order to deflate the value of the huge debts they have accumulated.
Ruffer Investment Company (RICA) is another trust where the managers have argued there are more risks in markets than others may be seeing. Manager Duncan MacInnes has argued that inflation is going to be more volatile in the years ahead, with periods of very low and high inflation prints, as opposed to them being at one continuously elevated level.
Whether that’s correct remains to be seen. But the US inflation print this week was a reminder that, although we may ultimately not end up living through a period like the 1970s again, risks remain and investors should be cognisant of them.
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