This week I chalked up a new pandemic first: trying to figure out what the chances are of my energy provider going bust. After 18 months of the pandemic, I had hoped that life would be largely back to normal, and in many ways it is. However, wholesale gas prices in Europe are up 75% since July and +267% in 2021, and are yet another example of how inflationary pressures, most of which are related to the shock of the pandemic, are proving to be more stubborn than hoped.
Since I wrote in May about inflation becoming the primary concern for investors, we’ve had a worrying resurgence in Covid thanks to the Delta variant, global economic growth decelerating, and yet markets have steadily ground higher. The debate around inflation remains as polarized as ever.
For some, the recent spike in gas prices is just that, a spike, and will subside in coming months if supply issues are resolved and the wind picks up a bit. They will join the list of other goods and services, from lumber to used cars, whose prices in the US rocketed earlier in the year as vaccines were rolled out, and which have since subsided.
Yet there are many other supply issues that are continuing to be exacerbated by ongoing Covid disruption, particularly in Asia. When one of the world’s busiest shipping terminals in China can be closed for a fortnight due to one case of Covid, it is little wonder that shipping is under such a strain. Costs to ship a container from China to the US are now up +314% since 2019 and +886% to Northern Europe. Probably best to get the Christmas shopping done early this year.
As and when these supply-side pressures fade, another form of inflationary pressure looks likely to replace it. Labour shortages are becoming more widespread and are not limited to lorry drivers. In the US the number of jobs openings reached a record of almost 10.9 million in July, with 8.7 million unemployed. With more jobs than people to fill them companies are going to have to raise wages to entice applicants, especially when 3.2 million are reported to not be seeking work due to latent Covid concern. The rest are probably making too much money trading cryptos. Nevertheless, higher wages mean higher costs that will likely be reflected in higher prices.
While higher wages may result in higher prices, they may also lead to higher consumption and stronger economic growth, which should be welcomed. Unlike the price movements of commodities, for example, once wages rise, it is harder for them to fall. We believe that this effect will keep inflation above target for some time, but not spiralling out of control.
Above target inflation is not necessarily a bad thing in a world with such powerful disinflationary forces as slowing population growth and cheapening technology. But it comes with risks, especially to a market that is priced for perfection. It means the actions of central bankers will be scrutinized ever more closely, perhaps even as closely as my family’s use of the thermostat this winter.