Inflation in 2024 – it was always dormant, never dead

Throughout London and across financial centres all over the world, the word of the moment is most definitely one to strike unease: ‘inflation’.

Haunting politicians and economists alike, inflation has made a strong comeback from its most memorable domestic era in modern history – when it sought to dominate the 1970s – and now continues to plague markets with volatility in the mid-2020s. Two questions come with it: how did it get this bad… and can we stop it?

A rather sorry state of affairs

UK CPI figures released in mid-January show that inflation rose – rather surprisingly – to 4% in December 2023, following ten consecutive months of decline. In symmetry, recent news from the US that inflation there ticked up to 3.4% has helped to render what was an increasingly rosy macroeconomic picture slightly spoiled with grey. This uptick in inflation – on both sides of the pond – has resulted in bond markets becoming unsettled, creating mass uncertainty for financial markets in London and New York. This impacts both business and consumers alike, who are now facing what seems like an insurmountable cost of living crisis; one so tough that the World Economic Forum recently rated it as the fourth biggest global risk in 2024.

The political landscape does not fare much better. Rishi Sunak’s Conservative government continues to pedal away, trying to stop inflation in its tracks with the determined hope that it may just save them from ejection come the autumn general election, while the Labour party anxiously awaits its return to Downing Street after fourteen long years locked outside the gates. In Washington D.C., Joe Biden sits in the Oval Office like a man condemned to execution come 5 November – while an impatient Mr Trump preaches American protectionism as the answer to all American woes. There is a near-universal nervousness across global markets, particularly when the astounding volume of democratic elections to be held throughout 2024 is factored in; more than 2 billion voters in 50 countries will be heading to the polls. After all, whichever side of the political divide they fall on, every politician appears to promise a fresh splurge of spending while failing to consider the responsibilities around their borrowing. This does not offer any of us a great deal of hope when it comes to the ability of new administrations to tackle excessive inflation in democracies around the world.

Rocking the boat

Considering all of this, it’s no surprise that plenty of people made a Christmas wish for lower interest rates, cooling inflation and just a tad of stability for 2024. As to whether that wish will be granted… that decision is very much on a knife-edge. The Bank of England’s Monetary Policy Committee has repeatedly pleaded with the City not to rely on interest rate cuts this year, while the American camp may be in for more luck with the Federal Reserve teasing that it will most likely begin cutting rates in the next six months. Economists ‘um’ and ‘ah’ over how long inflation will take to fall and exactly when interest rates will be cut, while retail bosses present a divided front. The British Retail Consortium fears that inflation will take off again and a senior boss at Associated British Foods, the group that owns British fashion brand Primark, has clearly stated his view that inflation will persist at an exceedingly high level, whereas FTSE 100 retail mecca Next offers a stark contrast, hailing a period of ‘zero inflation’ and promising that it will not raise consumer prices this year. In fact, it is clear that the one thing we can all be certain of is exactly how uncertain we all are.

“Events, dear boy, events” 

However, even considering how desperate many people are for resolution of our current economic state, we must be careful of equating interest rate cuts with a white knight. Once it has set in, inflation is determined to stick around and it is not possible to control it like a thermostat, moving interest rates up and down whenever we see fit – nor can we blame inflation’s persistence on geopolitics or sudden pandemics. Contrary to the ready-made government line, we can only attribute a small percentage of inflation to conflicts in eastern Europe and in the Middle East, or to the 2020 Covid-19 pandemic or volatile oil prices. While these events are no doubt inflammatory, they are not sufficient to cause our current inflationary pressures on their own.

Instead, we must look to our own monetary policy decisions – much to the denial of our politicians and central bankers. Simply put, monetary policy has been too loose for too long. Fiscal policy too has blood on its hands; governments across the world must take a step back and seriously reconsider their stances on taxation, spending and borrowing, as these factors offer a sizeable boost to inflation when they are not handled carefully. Geopolitical affairs merely provide a handy ‘get out of jail free’ card for the decisionmakers to whip out when the going gets tough and nobody wants to claim responsibility for the new economic reality that they have helped to create. Westminster can simply raise its hands and proclaim an old mantra of Harold Macmillan’s when faced with turmoil caused by inflation: “events, dear boy, events”.

Lessons in history

As to where we stand right now – perhaps we’re no further forward than we were with Harold Wilson at the helm fifty years ago.While UK inflation peaked in 1975 at 27% – and nobody wants to be that far back again – we’re certainly seeing a marked period of rapid inflation growth, initiating an indominable cost of living crisis for households both in Britain and further afield.

A potential route to target inflation is to stringently re-examine a government’s position on its monetary and fiscal policy strategy and move forward with caution. When it comes to tackling inflation, central bankers and politicians must come together to formulate an effective remedy. We can always be sure that, just like Arnold Schwarzenegger’s Terminator, inflation will be back – but we can make sure that we are in the best position to temper it when it rears its ugly head once more. Considering all of this, one question that we have for businesses – from a financial communications perspective – is perhaps more complex than it looks: are we really talking about inflation enough?

We Need to Talk About Inflation

For those interested in a deep-dive, observing inflation across history from ancient Rome to the American Civil War, spare some time to give Stephen D. King’s We Need to Talk About Inflation a read. King doesn’t hesitate in laying out the true causes of inflation (government excuses aside!) and instead roots out the key lessons from history, questioning why we have not learned anything from them. No wonder it achieved Financial Times’ ‘Book to Read in 2023’ accolade.

– James Laing and Olivia Rhodes

To hear more from James Laing and his thoughts on the global macroeconomic environment, listen to our podcast series ‘Market Share’, where James and Tavistock’s David Cracknell discuss the topics of the moment.