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In the last Market Update, we highlighted the rise of inflationary pressures. Which are largely a by-product of the Covid 19 pandemic and its effect on supply chains. Now, most commentators and economists have ceased to use the word “transitionary” for inflation expectations. The “I” word will be around for some time it seems.
Back in Autumn 2020, we hopped into our Tardis for a look backward. Now would be a good time to do this again – to get a perspective on where we are. I have selected 1974 as our destination. Those with long memories will remember in January of that year the Government imposed a three-day week due to coal shortages. So let’s hope the gas supply holds up in 2022!
The inflation rate in terms of the RPI in December 1974 was 19.1%, it peaked the following August at 26.9%. It is unlikely that inflation will return to these levels. However, there is the danger of a return of wage/price inflation. Where wages rise to meet prices, which rise again leading to more wage demands. Most certainly a 1970’s phenomena which we have not seen for about 30 years.
Another echo from 1974 is supply chain disruption and commodity prices. Back then it was a shortage of sugar, owing to the fact that the Caribbean countries diverted their production to the more lucrative US market. This led to panic buying and the threat of sugar rationing. There was already a crisis in the baking industry, with workers at commercial bakers striking in search of a pay rise of more than sixty percent.
The flipside of high prices was high interest rates. At the end of 1974, the Bank of England’s Base Rate was 11.50%.
In terms of climatic concerns, the fear was of a new ice age with the cooling effect of aerosols released into the atmosphere overwhelming the warming effects of carbon dioxide.
So what does this all mean for 2022? It is unlikely that we will see inflation or interest rates anywhere near 1974 levels. But we will see them rise over the next 12 months. In addition, as the UK embarks on the “Great Payback”, repaying the money borrowed during the pandemic, we should also look out for tax rises of some sort. Hopefully, we have learned from the economic policy mistakes of the past. But as Mark Twain said, “History does not repeat itself, but it does rhyme”.
Perhaps investment markets should take their lead from the greatest sporting event of 1974 – the “Rumble in the Jungle” when against the expectations of all the “experts” Muhammed Ali knocked out George Foreman to reclaim the Heavyweight Championship of the World. As Foreman pawed at the ropes trying to drag himself to his feet the words of Harry Carpenter echoed around the world “… he’s doing the shuffle! I don’t believe it he’s going to win the Championship back at 32!”.
Investment managers will need to be on their toes in 2022 – but as with Ali, they could beat expectations.