How long will high inflation last?

[Adamski]

Wondered what you guys think? Peaking soon 9-11%? Then coming down slowly over next 18 months? Back to 2% 2024? Dependent on Ukraine and supply issues unwinding?

[simoan]

Wondered what you guys think? Peaking soon 9-11%? Then coming down slowly over next 18 months? Back to 2% 2024? Dependent on Ukraine and supply issues unwinding?

I think you're asking the wrong question. How high will interest rates need to go to stop inflation? Is the most important questions with regard to an investment strategy.

All the best, Si

[BullDog]

I think the massive increase in food and energy prices that have happened and are yet to arrive in the UK might do a lot if the heavy lifting of damping down inflation with or without large increases in interest rates. On top of that, there's national insurance increases and next year a huge jump in corporation tax arrives. Given the UK economy these days seems to depend largely on consumers spending money, I expect inflation might be past it worst by the end of this year. Of course, I might be very wrong.

[1nvest]

With China/India ...etc. seeing the equivalent of the entire UK population moving from fields/farming into cities/middle-class every couple of years, I'd guess when consumer prices had doubled, house/stock prices had fallen considerably relative to former levels in real terms.

Historic UK stock (FT All Share) price only real (after inflation) drawdowns ....



When might a -66% drawdown peak (trough) occur ??? Could be this year, next year, or in 5 years time. I'm more inclined to several years for large UK debt erosion. BoE/Government policies of talking the talk of ...

"Next year it will be over" and then come next year, "a while longer yet" and then another year later "oh its more prolonged/embedded than we thought" combined with a crunch, and many sitting on a third of the wealth they formerly opined they held.

Former generations called such periods the likes of "return of capital more a concern than return on capital". When millions have millions then its like football, you don't get good results as there's low incentive to put in time/effort when you can instead just sit in a chair doing nothing. To address that millions losing their millions induces time/effort.

[NotSure]

I think the massive increase in food and energy prices that have happened and are yet to arrive in the UK might do a lot if the heavy lifting of damping down inflation with or without large increases in interest rates.

Honest question - how do massive price increases in essential items damp down inflation? By suppressing demand for everything else? Their first effect will surely be to spike inflation as defined by CPI/RPI and unless they rapidly plummet again, that'll stick for a year.

On top of that, there's national insurance increases and next year a huge jump in corporation tax arrives.

Not if current PM front-runner Truss has her way. NI has already gone up, and may go down again. Edit - and if corporation tax does go up, along with energy, won't that have to be passed on to consumers?

[dealtn]

I think the massive increase in food and energy prices that have happened and are yet to arrive in the UK might do a lot if the heavy lifting of damping down inflation with or without large increases in interest rates.

Honest question - how do massive price increases in essential items damp down inflation? By suppressing demand for everything else? Their first effect will surely be to spike inflation as defined by CPI/RPI and unless they rapidly plummet again, that'll stick for a year.

Yes, that's the first effect. But...

Imagine an economy where everyone earns 10,000 spends 8,000 on everything else 1,000 on food and energy and saves 1,000. Now all food and energy prices double and they are inelastic (demand and quantities don't change much as a result of price changes). Prices have gone up, but the economy is weaker as people have less ability to save, and cut back on other spending as a precaution. That reduction in spending is on the more elastic range of goods so quantities bought drop (companies suffer and reduce employment etc.)

Roll forward a year and no prices change. Inflation drops sharply. The economy remains weak.

Depending on the cause of inflation it can lead to (delayed) deflationary economic weakness.

[Kantwebefriends]

I read a piece recently from Ruffer. The thrust was that they expected inflation to be volatile. My interpretation is that when inflation starts to fall from its coming peak, it could well reverse course and rise again.

[Hariseldon58]

Clearly no one ‘knows’ but I wouldn’t be at all surprised that inflation remains above 5% for a few years.

It becomes ingrained in the mindset, it’s hard to break the cycle.

[Alaric]

It becomes ingrained in the mindset, it’s hard to break the cycle.

The feedback loops don't help either. When an organisation is allowed to increase its prices because of a measured increase in prices across the economy as a whole, that's liable to feed back into the next measurement. The same applies when wages are given a "cost of living" increase when the increase in cost is clawed back by increased prices. If the wages or pensions are financed as part of the public sector that feeds back as increased taxation or increased borrowing.

[Urbandreamer]

If you want me to stick my finger in the air and make a guess..... 7 years.
Give or take 2 years.

By "high" inflation I'm assuming that you mean above 4%, though I recall FAR higher inflation than that over periods that lasted 5 years or so.

However the question was "how long", not how high will inflation be.

I'm betting that it CPI peeks at just over 9%, though I wouldn't be surprised to be wrong and it exceeds that.

To be blunt, I'm suffering "dire prognostications".
Somewhat due to having seen and experienced serious inflation in my time.

[Bubblesofearth]

Yes, that's the first effect. But...

Imagine an economy where everyone earns 10,000 spends 8,000 on everything else 1,000 on food and energy and saves 1,000. Now all food and energy prices double and they are inelastic (demand and quantities don't change much as a result of price changes). Prices have gone up, but the economy is weaker as people have less ability to save, and cut back on other spending as a precaution. That reduction in spending is on the more elastic range of goods so quantities bought drop (companies suffer and reduce employment etc.)

Roll forward a year and no prices change. Inflation drops sharply. The economy remains weak.

Depending on the cause of inflation it can lead to (delayed) deflationary economic weakness.

Imagine an economy where any reduction in disposable income is made up by government printing. As an admittedly extreme example imagine if they simply gave everyone money to pay their energy bills...

BoE

[BullDog]

Yes, that's the first effect. But...

Imagine an economy where everyone earns 10,000 spends 8,000 on everything else 1,000 on food and energy and saves 1,000. Now all food and energy prices double and they are inelastic (demand and quantities don't change much as a result of price changes). Prices have gone up, but the economy is weaker as people have less ability to save, and cut back on other spending as a precaution. That reduction in spending is on the more elastic range of goods so quantities bought drop (companies suffer and reduce employment etc.)

Roll forward a year and no prices change. Inflation drops sharply. The economy remains weak.

Depending on the cause of inflation it can lead to (delayed) deflationary economic weakness.

Imagine an economy where any reduction in disposable income is made up by government printing. As an admittedly extreme example imagine if they simply gave everyone money to pay their energy bills...

BoE

Which is exactly what's happening thus autumn? Not such an extreme example?

I am obviously not an economist, but my layman's view is that the UK economy is heavily dependant on consumer spending, mostly on imported goods and is very weak indeed in manufacturing. Then higher energy costs, higher taxation, higher interest rates, are pretty powerfully deflationary. Of course, I could be a zillion miles wrong.

[dealtn]

Yes, that's the first effect. But...

Imagine an economy where everyone earns 10,000 spends 8,000 on everything else 1,000 on food and energy and saves 1,000. Now all food and energy prices double and they are inelastic (demand and quantities don't change much as a result of price changes). Prices have gone up, but the economy is weaker as people have less ability to save, and cut back on other spending as a precaution. That reduction in spending is on the more elastic range of goods so quantities bought drop (companies suffer and reduce employment etc.)

Roll forward a year and no prices change. Inflation drops sharply. The economy remains weak.

Depending on the cause of inflation it can lead to (delayed) deflationary economic weakness.

Imagine an economy where any reduction in disposable income is made up by government printing. As an admittedly extreme example imagine if they simply gave everyone money to pay their energy bills...

BoE

OK, but so what? How does that assist in answering NotSure's question which I was answering?

[NotSure]

I think the massive increase in food and energy prices that have happened and are yet to arrive in the UK might do a lot if the heavy lifting of damping down inflation with or without large increases in interest rates.

Honest question - how do massive price increases in essential items damp down inflation? By suppressing demand for everything else? Their first effect will surely be to spike inflation as defined by CPI/RPI and unless they rapidly plummet again, that'll stick for a year.

Yes, that's the first effect. But...

Imagine an economy where everyone earns 10,000 spends 8,000 on everything else 1,000 on food and energy and saves 1,000. Now all food and energy prices double and they are inelastic (demand and quantities don't change much as a result of price changes). Prices have gone up, but the economy is weaker as people have less ability to save, and cut back on other spending as a precaution. That reduction in spending is on the more elastic range of goods so quantities bought drop (companies suffer and reduce employment etc.)

Roll forward a year and no prices change. Inflation drops sharply. The economy remains weak.

Depending on the cause of inflation it can lead to (delayed) deflationary economic weakness.

Thank you. But what happens if wage increases/tax cuts/hand-outs come along to plug the gap? I'm guessing Sunak is correct and Truss is dangerous?

[BT63]

.....Historic UK stock (FT All Share) price only real (after inflation) drawdowns ....When might a -66% drawdown peak (trough) occur ??? Could be this year, next year, or in 5 years time. I'm more inclined to several years for large UK debt erosion.

At the end of 2021 the Dow Jones was higher above its inflation-adjusted trendline than at any time other than 1928-1930 and higher than the 2000s or 1960s peaks.
Even during the recent correction/bear it was still sitting around the same elevated level as that which preceded the 2000 or 2008 50% bears.

The most likely outcome would be an approximate two-thirds decline vs inflation over the next 10-20 years, surprisingly similar to the FTAS you mentioned.

And to back that up, the high P/E of the US at the end of last year before this bear began, points towards a most probable outcome being a mid-single-digit annual real loss for the Dow over the next 20 years, which interestingly, gives an identical suggestion of an approximate two-thirds loss vs inflation over the next decade or two.

I think the next decade or two will be very tough for investors. But for now we have our first major bear market rally underway at the moment (which might even push high enough to make a nominal new high) and that will make bearish predictions look stupid for the next few weeks or months.

[dealtn]

I think the massive increase in food and energy prices that have happened and are yet to arrive in the UK might do a lot if the heavy lifting of damping down inflation with or without large increases in interest rates.

Honest question - how do massive price increases in essential items damp down inflation? By suppressing demand for everything else? Their first effect will surely be to spike inflation as defined by CPI/RPI and unless they rapidly plummet again, that'll stick for a year.

Yes, that's the first effect. But...

Imagine an economy where everyone earns 10,000 spends 8,000 on everything else 1,000 on food and energy and saves 1,000. Now all food and energy prices double and they are inelastic (demand and quantities don't change much as a result of price changes). Prices have gone up, but the economy is weaker as people have less ability to save, and cut back on other spending as a precaution. That reduction in spending is on the more elastic range of goods so quantities bought drop (companies suffer and reduce employment etc.)

Roll forward a year and no prices change. Inflation drops sharply. The economy remains weak.

Depending on the cause of inflation it can lead to (delayed) deflationary economic weakness.

Thank you. But what happens if wage increases/tax cuts/hand-outs come along to plug the gap? I'm guessing Sunak is correct and Truss is dangerous?

Hard to imagine real wage increases in the short term, but nominal ones will provide some support to households in the short term.

How effective interventions by the state are, and the trade offs between the short and long term, are the crux of debate amongst economists. For some, government demand is an effective substitute for consumer demand, and an important policy tool in such circumstances (although it's reversal and withdrawal of fiscal assistance in subsequent recovery periods is usually absent from the debate, and in practice). The alternative view is that consumers "rationally" discount government intervention believing that subsequent taxation, or repayments of government borrowing, to pay for it, will be a future cost to bear. Therefore any individual needs to adjust and save to meet this "new" future cost. The adjustment offsets the government led stimulus.

[scrumpyjack]

I see it reported on Bloomberg today, along with the increase in base rate to 1.75% that BoE officials think inflation may peak at 13.3% in October.
What was that bit in their remit about targeting 2% inflation? Bailey should go.

[Mike88]

The Bank of England are forecasting inflation to rise to 13.3% but will fall back after the next 2 years. But I doubt whether we will see 2% for a very long time. The war in Ukraine alone is having a massive effect of inflation due to the escalation in energy prices according to the B of E.

[absolutezero]

These BoE sharks are the same lot who said inflation would be 'transitory'.
Meanwhile anyone with a functioning central nervous system saw otherwise.

Take what they say with a massive pinch of salt - and assume it will be MUCH worse.

[ADrunkenMarcus]

I think the next decade or two will be very tough for investors.

I tend to agree in the sense that I don't think we will see the strong returns of the 2010s. However, for those of us accumulating then a period of share price weakness is beneficial, whether we are adding new capital or reinvesting dividends. The problem from my perspective is I see no chance of my wages even matching inflation this year or next, which means less (or potentially no) capital to invest.

And I think we will see UK households and consumers under enormous strain (they already are) simply to keep food on the table. That has serious implications for many companies and discretionary expenditures.

Best wishes


Mark.