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Category: Glint Special Report

Glint Special Report: Jobs are up but so is inflation – how should central banks react?

It's been a busy week in the UK so far with several government announcements indicating exactly where we are in terms of our recovery from the Covid-1...

20 May 2021

Sean Cope

It’s been a busy week in the UK so far with several government announcements indicating exactly where we are in terms of our recovery from the Covid-19 pandemic.

Firstly, some positive news – the unemployment rate fell slightly to 4.8% but there were green shoots in terms of the jobs market with 657,000 vacancies, up by almost 50,000 on the previous quarter. Positive signs of recovery, at least in the jobs market. But that’s about it for good news, I’m afraid.

A closer look suggests that there is still a long way to go. We’re still far behind pre-pandemic levels with around 750,000 fewer people in employment than this time 12 months ago. In the US, the employment level is 10 million jobs below its pre-pandemic level.

Once again, the younger generation has been hit hardest with 289,000 fewer employees under the age of 25 on the payroll than 12 months ago – largely due to the higher proportions of workers from this demographic in the catastrophically hit sectors of hospitality, leisure and retail. This generation is at serious risk of being further left behind and the financial inequality that is already prevalent will only worsen.

We all knew the Covid recovery would take time so these figures, whilst still concerning, unfortunately aren’t that surprising. The biggest worry is the latest round of inflation figures as well as central banks’ acceptance of what appears to be rapidly rising inflation and their seeming reluctance to do anything about it.

In the UK, inflation more than doubled to 1.5% last month and there are signs that not only will we surpass the Bank of England’s 2% target this year, we’ll even hit 2.5%. In the US, expectations for consumer price inflation now range between 3% and 6%.

Last week, we also saw inflation figures from the world’s two largest economies. Unfortunately, these also made concerning reading – inflation rises in both the US (4.2% – discussed in more detail in last week’s newsletter) and China (0.9% although they have a target of 3% this year) meant that consumers are facing price hikes at the precise moment that they are beginning to rebuild after the pandemic. In China, there is potential for far worse to come as producer prices increased 6.8% over a year, the fastest rise since October 2017 – as the largest producer globally, there should be real concern if these increased costs are passed on to consumers.

As long as inflation continues to rise without intervention from central banks, consumers and savers will be hit. In the UK at least, the conversation around the introduction of negative interest rates won’t die down; add the £300bn borrowed to struggle through the Covid-19 pandemic and continuing quantitative easing to this climate of historically low interest rates and we have a perfect storm which devalues our cash and our savings by the day. According to the National Audit Office the UK has spent £372 billion so far on measures designed to combat the impact of Covid-19.

It’s difficult to see how central banks will rescue the situation, especially as there appears to be little to no inclination to increase interest rates. This reluctance isn’t surprising; there is fear of the markets sliding even further and interest rate rises could snuff out the embryonic economic recovery. However, the time to act is now before another generation is financially crippled for life.

US Treasury Secretary Janet Yellen might still think that there isn’t an inflationary problem, but she may soon be the only one.

With all the above factors in place, and central banks’ apparent disregard for the financial welfare of consumers, it’s no wonder that alternative currencies have flourished in recent months as consumers and savers search for value. Markets are down, ISAs offer minuscule interest; where else can we turn? Cryptocurrencies may have grabbed the headlines but, ever since Elon Musk’s hint that Tesla may sell its Bitcoin holding sent prices crashing across the crypto market, the average consumer will be understandably cautious about investing in such volatile assets. By comparison, although the value of gold can decline, it is up 11% in just six weeks and whilst still below last summer’s peak this appears to be the perfect opportunity for it to remind us all why it has been the ultimate long-term store of value for centuries.

 

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