Janus Henderson Investors: UK Budget suggests rising medium-term inflation risks

The package of fiscal and financial measures targeted at mitigating damage from the coronavirus shock is welcome. The necessity of a half-point Bank rate cut and the wisdom of “the largest sustained fiscal loosening since the pre-election Budget of March 1992” are strongly in doubt.

The OBR’s characterisation of Chancellor Sunak’s package does not take into account the additional £12 billion (0.5% of GDP) lobbed in at the last minute as a coronavirus response.

Fiscal / monetary easing is being combined with further large increases in the minimum wage against a backdrop of coming negative supply shocks from tighter immigration controls and Brexit trade frictions. The medium-term consequences could be strongly inflationary.

UK policy-makers would make better decisions if they were attuned to the roughly 18 year housing market cycle, which is due to reach another peak later this decade. Inflation usually embarks on a major upswing in the years preceding peaks.

The post-war pattern has been for Prime Minister / Chancellor duos – usually Tory – to embark on significant policy easing as the cycle starts to accelerate, exacerbating later inflationary problems. Think Heath / Barber and Thatcher / Lawson. Johnson / Sunak fits the pattern perfectly.

Bank of England Governors, for some reason, are rarely credited for their role in the historical boom / bust debacles. Mark Carney will deserve an honourable mention if events play to script.

Monetary trends have been weak but may now strengthen significantly, confirming rising medium-term inflation risks.

The coronavirus shock has resulted in a major and probably unjustified cheapening of inflation hedges. Today’s UK policy moves are likely to be mirrored globally and suggest an emerging buying opportunity for such hedges.