Inflation: Just in Time, Just in Case

Inflation doesn't just hurt your money...

THANKS to Storm Eunice, we just spent three days without electricity, writes John Stepek at MoneyWeek magazine.

On the upside, it's saved me some cash on our otherwise exorbitant utility bills. No more shouting at the kids: "Turn the light off when you leave the room!"

On the downside, I spent all of that and more on moving between our local cafes and pubs in a quest for heat, wifi and laptop charging points.

What has this experience taught me? Nothing terribly useful, I'll admit. Being without heat or light for 72 hours is a chronic pain in the neck. Who'd have guessed?

However, I'm a writer, so I need to crowbar this experience into a column somehow. And that's just what I'm about to do.

If there's one thing our bout of 1970s-style energy deprivation made me think about, it was convenience.

Obviously, not having any heat or light is very inconvenient. I've experienced enough minor power cuts now to at least have made the effort to put a few torches somewhere I can actually put my hands on them. And to have a decent supply of candles.

But a candle-lit house loses its charm pretty rapidly once you realise – particularly when the days are overcast – just why people used to rise and go to bed with the sun. It's not that easy to read by candlelight or even electric torchlight. And getting into bed is all the more tempting when you're freezing.

More to the point, planning ahead becomes very tricky when you're not sure when the power is going back on. If I'd known it was going to be three days (as opposed to the deadline for fixing the fault being constantly edged forward), I could have planned for that. As it was, there was a lot of inefficient roaming around and not getting very much done.

What tenuous link am I going to draw between this tedious mini-adventure and the investment environment?

Well, as I often do at the moment, I'm going to bring this back to inflation. Inflation has a lot of different effects on an economy, but one thing sums them up: inflation is just very inconvenient.

How? Rising prices make it hard to plan ahead; a "just in time" mentality will no longer suffice. Who's to say you'll be able to get what you need when you need it at a price you can easily pay? It starts to make sense to adopt a "just in case" mentality.

You stock up on toilet roll, say. Not because shops might run out, as in the early days of Covid, but because buying it today is likely to be cheaper than buying it tomorrow. The return of the "time value of money" as an important concept doesn't just matter for shares and the "jam tomorrow" bubble – it matters for consumer goods too.

This doesn't just eat into your finances, it eats into your time too. Here's an example: my mobile service provider has just sent a letter with its latest price increases. For the past five to ten years, I haven't paid any real attention to this because the bill is low in absolute terms, and the price hikes – which are linked to CPI – have been negligible because CPI has been too.

Not this year, not with CPI sitting at 5.4%. Now I'm going to have to spend some of my valuable time either arguing with my provider or poring over comparison websites looking for a better deal. Or – even if I ignore it and just swallow the price rise – it's going to irritate me.

As I said, it's inconvenient.

Incidentally, this is also why rising consumer prices bite those with the lowest incomes hardest. What represents an inconvenience for someone whose income or savings gives them a bit of space to throw cash at problems, can rapidly spiral into a life-derailing problem for those living closer to the edge.

So inflation is disruptive. It's not necessarily all bad, but your behaviour needs to adapt. You need to prepare, you need to be more active, you need to think about both your wages and your wealth in "real" terms (ie, accounting for inflation) rather than just sitting back and relaxing as long as you're seeing the odd nominal increase.

Of course, this happens at a corporate level too. Who pays for those increased freight costs? What happens when previously-contracted terms are too onerous for one party or other (look at how the UK's energy suppliers have toppled like dominoes because their assumptions about the economic environment were entirely wrong)? Existing relationships grow more fraught.

This adaptive behaviour then feeds on itself. A "just in case" approach is more expensive than "just in time" ever was – tere's a reason we all moved to the latter, after all. But if we can't rely on "just in time" providing, what's the alternative?

As I've almost certainly already mentioned a few times, this is why I tend to think that inflation will be more enduring than most people currently expect. By the way, I was further convinced of this view by the fact that more than half of global fund managers still think that inflation is "transitory", whatever they think that means.

That's according to the latest Bank of America monthly global fund manager survey. Not only that, but a significant majority think that inflation is set to trend lower from here.

That said, some investors are clearly coming around to the idea that even if inflation isn't going to stay, the zero-percent-interest days are gone. Banks and commodities are a lot more popular than they were, and this is also being seen in a rotation towards the most widely-despised global developed market of them all – our very own UK.

To my mind, this trend has further to go. It's clear from looking at comments on any financial article that suggests the UK might be less than awful, that Britain is still deemed something of a pariah state. That's really, really comforting from a contrarian point of view. I think you can stick with the FTSE 100 for a good while yet.