What is to blame as consumers face inflation again after years of decline?
By David Clark  I READ the other day that around one third of financial analysts and money managers have no first-hand experience of the financial crisis in 2007/8. The same article depressingly informed me that the majority of the US population has no memory of the 1987 stock market crash. By the same token many market commentators and participants have never experienced an inflationary environment. Some of the clever people I work with have been making very seductive arguments for some time that the return of inflation is inevitable and would come as a shock to markets and consumers alike. This is becoming a more mainstream point of view and I note that inflation swaps are in strong demand amongst money managers as a hedge against a jump in the inflation rate both in Europe and in the US. Inflation has been in decline for four decades having been put to the sword by vigorous central bank policies in the 1980s, the growth of globalisation in the 1990s and the ongoing deflationary impact of the internet in the last twenty years or so. It is also interesting to note that some of the remedial action taken post the financial crisis, such as huge bond buying programmes, had not a jot of impact on the rate of inflation or consumer prices. All that happened was that bank reserves and asset values increased. However, this concern has not popped out of nowhere overnight. It has been bubbling away for some time. In fact, the tactics used by the central banks to combat the global financial crisis by what is euphemistically called printing money (no money is actually printed) are in and of themselves inflationary. This did not matter at first as the excess liquidity was used to prop up the ailing banking sector, but it matters now. This money is going into real peoples bank accounts via furlough and business support schemes. More money in circulation means rising prices  Economics 101. In addition, commodity prices have been rising sharply which pushes up companies input costs, encouraging higher prices thereby fuelling inflation. Wages too are on the up for all sorts of reasons, among them the lack of immigrant labour from Europe and beyond as well as students working from home. It is not just the hospitality sector that is struggling to find staff, other sectors are too. The Road Haulage Association claims there is a shortage of 70,000 HGV drivers in the UK, vacancies in finance are over 200% higher than this time last year and the list goes on. In the first quarter of this year pay growth in the UK was 4.6%, the fastest rise since 2007 and workers in low wage sectors are enjoying particularly strong increases with annual pay rising 6.1% in retail and 11.3% in leisure. At the risk of stating the obvious, inflation eats away at the value of the cash in your pocket and bank account. These days you are not even close to being compensated for this by a nice interest rate on your account. A stellar return on your savings would be 0.5%. UK CPI in May was 2.1%. You are growing poorer as you read this. The central banks say that we should not get overly concerned about this  the rise in inflation will be temporary they say. It is being fuelled by a period of excess consumption as people spend money that they have saved during lockdown. It is this that has caused tension in supply chains and that has caused prices to rise (nothing to do with Brexit of course, but that is a whole other article). So, its our own fault. But dont worry, it will pass, we are told. And if it does not, then interest rates will rise to combat it. Which means your mortgage payments will go up (a rise in repayment rates from 1% to 2% means monthly payments will increase by more than 10% - sorry about that) and you will feel even poorer. A cynic may point out that it is in the interests of the central bankers to look through these inflationary pressures, which they are very fond of saying that they do, lest anyone looks too closely at their own role in fuelling this situation. In the words of the legendary Francis Urquhart of House of Cards fame  You may think that; I couldnt possibly comment.  David Clark is an investment manager at Saracen Fund Managers.