This week’s inflation figures would appear to confirm the latter suspicions, and debunk the former – within the 0.7 per cent January ‘jump’ alcohol prices did indeed rise, while food prices slipped marginally. The biggest single contributor accounting for half of the increase was the recreation and culture basket, accounting for almost half of the rise – given that sporting events, theatres and cinemas remain shut, one can only assume that the increase has been driven by stay-at-home entertainment. And that’s even before Netflix puts the price of its top package up to £13.99 a month, a whopping 17 per cent increase.
Prices are rising elsewhere, too. According to the latest ONS figures, house prices rose 8.5 per cent last year, the fastest rate of growth since 2014 – that’s a quite incredible rate given the pandemic backdrop, but then again, an incredible amount of government support has also been thrown at this key sector.
And then there are commodities, and what is increasingly being referred to as a new supercycle. Alongside key metals like iron ore and copper, which have both almost doubled in price over the past year, metals involved in the world’s decarbonisation are flying. As Alex Hamer explores, that’s good news for the likes of BHP and Rio Tinto, and in turn they’re turning on the dividend taps, welcome relief for investors after a year of dividend turmoil.
Understandably, talk of a supercycle is making some people nervous – we have been here before during China’s post-crisis economic boom, and we know how that ended: a period of sharp retrenchment by the mining industry. Indeed, many observers believe that rather than being driven by supply and demand dynamics, much of the recent commodities price action is the result of speculation amplified by derivatives, and is thus destined to slip back. There is a more prosaic reason to be circumspect, too, which is simply that high prices will eventually see capacity switched back on, the age-old cycle of commodities – and one which applies to food production as well, as we explain in this week’s extensive report into agricultural investing.
Back to inflation, and the commodities rally may also start to feed in more substantially as the economic bounce back from Covid continues – something policymakers would certainly welcome as a means of tackling gargantuan deficits. For the rest of us, inflation could be more problematic – prices may be rising, but wages are not, held in check by the spare labour capacity we’re likely to see when the furlough scheme ends in April. And it will certainly affect decisions around portfolio construction, in particular exposures to bonds and cash. As for shares, countless studies leave us little the wiser as to what inflation may really mean for shares – high commodity prices might dent companies’ profits but high inflation might be supportive of the value rotation. Whatever the case, someone is going to get squeezed.
