Barclays fears echoes of 1970s inflation in the economy](Latest news & breaking headlines | The Times and The Sunday Times)
BARCLAYS CAPITAL, the investment arm of the high street bank, yesterday gave warning that investors were underestimating the dangers of inflation, adding that there were “echoes of the 1970s” in the current conditions.
Publishing their annual study of equity and gilt returns, Barclays Capital said that a resurgence in inflation could not be ruled out — and cited a host of factors supporting their case.
**Chief of these was China’s rapidly expanding economy, expected to grow at 9 per cent during this quarter. The country’s appetite for raw materials has pushed up commodity prices, with the spot price of hot-rolled steel jumping 30 per cent in the past month. Shipping rates have risen 550 per cent since 2001. **
Some analysts insist that China’s rate of growth is unsustainable, but Tim Bond, co-author of the report, said the Republic’s demand for commodities could last for some time.
“China is still at the bottom of the ladder,” he said.
Mr Bond also said that the US Federal Reserve’s accommodative policy on interest rates was based on some “fairly big assumptions” stemming from a view that deflation, a sustained period of falling prices, was the greater threat to economic stability. Barclays Capital said the recent trend had been for disinflation, a slowdown in price rises.
Technical factors might have also led markets to underestimate the risk of inflationary pressures. The favoured measure of US inflation does not reflect the massive rise in house prices in recent years, said the bank. Instead, the core consumer price index (CPI) used a proxy for rents, which had been falling.
Add to the mix persistently high energy prices and investors had a possible recipe for a return to 1970s-style inflation, where prices rose at double-digit levels each year. Mr Bond said: “It is quite unusual for market expectations of inflation to be as placid as they are today. Inflation has nowhere to go but up.”
Other analysts played down the prospect of a resurgence in inflation, saying that companies would absorb higher costs from China’s expansion.
Mark Barnett, a fund manager at Invesco Perpetual, said: “This will be a tax on companies because consumers are far more price sensitive than in the 1970s.”