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HAMISH MCRAE: Get ready for the price squeeze

It is a depressing run-up to Christmas and the New Year, and everyone knows why. What we will not know is how exhausting the Omicron variant will hit us all in the subsequent few months.

I’ll take a break from the column for the vacation week, however as we head into it let’s simply pause and take into consideration what we’ve learnt about world economics and finance over the previous yr, and look for methods during which it’s going to assist us take into consideration 2022.

The very first thing to say is that 2021, regardless of the whole lot, has been a yr of cheap success.

Rising inflation: 'The lags between what the central banks do and what happens to price levels are uncertain but we know they can be very long,' says Hamish McRae

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Rising inflation: ‘The lags between what the central banks do and what occurs to price ranges are unsure however we all know they are often very lengthy,’ says Hamish McRae

We will not have figures for a number of months, nevertheless it appears to be like as if the US economic system can have grown by 5.5 per cent, and be properly forward of its peak earlier than the pandemic struck.

The UK could have grown by 6.5 per cent, however as a result of we had a extremely unhealthy hit final yr, we’ll at finest be solely simply again to the place we had been in January 2020.

However, job development nearly all over the place is robust, exceptionally so in Britain, with extra individuals employed now than ever earlier than and job vacancies the highest for a minimum of 40 years.

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This image of a resilient restoration has been mirrored in monetary markets. The FTSE 100 index has been a little bit of a laggard in world phrases, however it’s up greater than 10 per cent in the yr thus far. The Dow Jones in New York is up greater than 18 per cent, and the wider S&P 500 up 26 per cent.

Similarly, home costs. The Halifax figures for November present the UK up 8 per cent, and Nationwide up 10 per cent.

These numbers usually are not estimates by economists. They inform what has really occurred, and they’re saying it hasn’t been a foul yr.

We will want all our resilience to hold us by means of subsequent yr 

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It has in fact been a horrible yr for individuals in the hospitality or airline industries, and in human phrases it has been an ideal pressure for many. The occasions of the previous fortnight are testimony to that, and I concern there’s extra to return. But in broad macro-economic phrases it has been OK.

Or it might have been had been it not for one enormous cloud, one which can even dangle over 2022. Inflation.

We have had the UK figures this week, displaying shopper costs up 5.1 per cent and retail costs up 7.1 per cent. And we’ve had the Bank of England’s response in growing rates of interest.

There are comparable will increase in costs in the US and Europe – although the response in growing rates of interest there has not likely begun. The bother for most individuals, nonetheless, is that only a few of us acquired 5 to 7 per cent will increase in our incomes.

We are being squeezed, and although there will probably be strong will increase in pay for individuals in robust negotiating positions, for many who squeeze from inflation will tighten in the months forward.

And so for 2022? Look, we’ve learnt over the previous 12 months how terribly resilient the world economic system has develop into.

For all the issues – the persevering with pandemic, the glitches in the provide chains, the chopping and altering Government restrictions, the stress to chop again on emissions, and so forth – the restoration has continued. Governments have helped however the robust stuff has been executed by companies, massive and small, throughout the world.

The grocery store cabinets have been stocked and restocked. The airways have managed to maintain flying. And the vaccines are being pumped out in enormous portions, with, detractors please be aware, the Oxford AstraZeneca one now the most generally produced in the world, with 2.2billion doses delivered.

We will want all this resilience to hold us although no matter is thrown at us subsequent yr. But what worries me most is inflation.

The lags between what the central banks do and what occurs to price ranges are unsure however we all know they are often very lengthy.

Imagine you might be filling a bucket. You carry on pouring the water in, kettle after kettle, and nothing appears to occur. Then you pour in a single kettle too many and all of the sudden the water is throughout the kitchen ground. I feel that’s what is going on now.

The central banks have been pumping the cash in, yr after yr. Now, bang, they discover they’ve flooded the world.

Inflation will finally be introduced beneath management. But till it’s, we’ll want all our resilience to deal with the social and financial distortions it’s going to trigger.

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