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Are we heading back to the 1970s – MoneyWeek

Bondmarketsnowexpectretailpriceinflationtoaverage3。

8%overthenext20years。

Thejumpmaybe“thefirstsignthatthemarketsarestartingtolosefaith”inpolicymakers’abilitytodeliver“lowandstable”inflation,saysCapitalEconomics。

Thepublic’sexpectationsarealsoheadingupwards,fuellingfearsofawage-pricespiral。

Nowonder。

Inflationis“acceleratingandbroadening”,saysTimBondofBarclaysCapital。

IthasspreadintoUKgoodsandservices,whileimportpricesfromoutsidetheEU,excludingoil,arerisingata5%annualpace。

Intheeurozone,despitethestrongcurrency,non-fuel,non-foodimportpricesareclimbingby6。

5%year-on-year。

Nowthatemergingmarketworkersare“battlingfortheirincomeshare”,asJohnPlenderputsitintheFT–Chinesewageinflationinthethirdquarterof2007wasup22%year-on-year–“thedevelopedworldwillhavetopaymoreforitsimports”。

Thedevelopingworldisnowspurringinflationofbothcommoditiesandimportprices。

Withimportedcompetitivedownwardpressureonpricesnowending,firmshopetoputpricesup;theAprilsurveyofsmallbusinessesinAmericashowedasharpriseinthoseintendingtodoso,eventhoughdemandisweak。

Suchreadingshavenotbeenseensince1981,saysBond。

Consumersareexpectinghigherinflation,withanet30%ofEuropeanworkersanticipatingacceleratinginflationoverthenextyear。

Centralbankshavedonelittleaboutthis;globalrealinterestrateshavedriftedlowerasinflationhasrisen。

Inflationconditionsarereminiscentofthestartofthe1970sandtheglobalpolicyreactionissimilar,sotheinflationoutcomeoverthenextfewyearsislikelytoresemblethe1970s。

Thatwasnastyforstocks:between1969and1979theaverageannualisedrealreturnfromequitieswas–2。

3%inBritainand–0。

9%inAmerica,saysBarclaysCapital。

Thereispressureonvaluationswheninflationishighaseconomicgrowthbecomesmorevolatileandinflationthreatensthevalueoffutureprofits。

Inthe1970s,onlyoilandgas,financialsandindustrialgoodsenjoyedpositiverealearningsgrowth。

Similarly,theonlysectorslikelytodeliverpositiverealreturnsinthisinflationaryperiodareenergy,basicresourcesandindustrialgoodsandservices–thoserelatedtorawmaterials,saysBarCap。

Lastweek’sinflationfiguresinBritainhighlightthepotentialoverallsqueezeonearnings,saysTheEconomist。

Firmspushedoutputpricesupto7。

5%,butthiswasn’tnearlyenoughtocompensatethemfora23%jumpinthecostofrawmaterials。

And“itwillbeevenmoredifficulttomaintainprofitmarginswhenconsumersareunderpressure”。

Andaswenotedlastweek,thecreditcrisislooksfarfromoverandisonlyjustbeginningtoaffectAmericaandEuropeaneconomies。

EmergingeconomiesarenotonlyunlikelytodecouplefromlowerWesterndemand,butarehavingtotightenmonetarypolicytokeepalidoninflation,thushamperinggrowth。

Thatalsoportendsaslideincommodities。

Alikelysharpglobalslowdownmeansdeflationlooksmoreofaproblemthaninflation,reckonsDresdnerKleinwort。

Butwhateverhappens,it’shardlygoingtobemuchfunforequityinvestors。

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