An inflationary tsunami is coming

There is an inflationary tsunami coming. You can see it from a distance, and the financial horizon has already shifted as it barrels towards us. Almost everyone who is paying attention knows it, but to listen to the musings of government ministers, you would think it was little more than a slightly higher spring tide.

The most obvious signs are already here, with the jump in petrol prices, the constant refrain from companies having to pay up to get raw materials from grains to metals, and (non-Russian) oil supplies desperately tight. Oil analyst John Kemp says: “The most remarkable thing is not how high prices are at the moment but that they have not already spiked much higher.” Industrial users are threatening to shut down for fear of being bankrupted by the cost of fuel.

Next month’s rise in the gas price to the consumer has been well signalled, and there are some confusing measures in place to soften the blow – helped by a mild winter (thank you, global warming) and the advent of spring.

Yet those measures were dreamed up before the Russian invasion, to deal with what looked like a temporary price surge. Only a few optimists still believe that, and at current spot prices implying a £3000 tariff cap, April’s £1977 now looks like a bargain rather than a peak. Projections of 10 per cent inflation as the consequences work through the economy no longer look fanciful, and even before the new year’s tax increases take their bite out of take-home pay, a fall in living standards is inevitable.

In truth, there is not a great deal the government can do to ease the pain, which will get worse next winter. It is (almost) too late to rescind the rise in National Insurance contributions, while piling the green subsidy onto general taxation makes a bad deficit worse, and is merely financial prestidigitation.

However, there is a tidal wave of sympathy following the horrors we see nightly from Ukraine. Capturing that is the best chance to head off the threat of gas price riots, or at least of widespread strikes from workers trying to keep up with inflation. Stinger missiles and fine words are all very well, but some plain speaking of the serious financial pain to come at home is overdue, and given the scale of the slaughter, the British population may be prepared to make real sacrifices. Our prime minister, of all people, knows where to look in search of inspiration.

Legal, General and non-compliant

Sir Nigel Wilson is the embodiment of Tom Lehrer’s Old Dope Pedlar, who is doing well by doing good, only he’s doing so by Legal & General methods. The CEO of the UK’s leading life assurance business – not a lot of competition here, it must be said – wins headlines for using L&G’s cash to build houses in factories, develop student accommodation, and find more imaginative uses for money than simply buying government bonds.

The returns so far have justified the extra risk, even if the market has never quite overcome its nerves, so us shareholders have had to settle for income rather than capital gains. After a decade in charge, newly-knighted Sir Nigel’s enthusiasm is undimmed. With the results this week he saw a world “awash with projects”, as he wanders round Britain’s cities. A relaxation of the prudential rules governing how much “risk-free” capital must be provided to balance the risky business of actually creating things will also help release more cash to do so.

While it is obviously riskier to build homes to let than to shuffle a portfolio of government bonds, it is hard to see it being a worse long-term bet, considering the likely course of house price rentals and the 1.5 per cent return for lending to HMG for a couple of decades. However, there are other risks at L&G. A big construction contract could go badly wrong (it happens). Sir Nigel might start to believe his own publicity, or if he doesn’t, the compliance police may come after him, because more than 10 years in charge breaks the corporate governance code. Let us hope he is the exception that tests the rule.

More bad banking behaviour

Lost in the fog of war last week, there was a small victory for a local authority against a voracious bank. Newham Council settled its case against Barclays, on terms which effectively ends a shameful little episode in the life of this accident-prone bank.

Newham had borrowed £238m in so-called LOBO loans, Lender Option Borrower Option, and if the council’s representatives failed to understand what they were doing, it’s hardly a surprise. Here’s ex Barclays Capital employee Rob Carver to explain: “You just need a Bermudan swaption pricer to know the relevant volatility surface, some kind of interest rate model calibrated to the appropriate processes and the full forward and spot curve.”

Of course. The upshot for the poor saps at Newham, or rather their council taxpayers, was a teaser rate which looked cheaper than borrowing from the Public Works and Loans Board, but which allowed the bank to progressively turn the screws. Some local authorities are paying 7-9 per cent as a result, “replacing safe fixed rate 50-year loans from Central Government with new variable rate loans that could end in 5 years time and need to be repaid in full.” That’s from #NoLOBOs.

With luck, the Barclays settlement will force other banks to be pushed for better terms, although the dealers will doubtless have moved on to even more one-sided offers by now. The moral is the universal one for investing: never buy something you don’t understand, however attractive the salesmen make it sound.