Whilst the maelstrom of media and political attention has focused on UK inflation rising as a consequence of the sharp fall in sterling since the EU referendum result, other factors have also been at play.
Principle amongst those are the rise in oil and commodity prices from exceptional lows, and the upward revisions in GDP forecasts and other economic data.
Indeed such is the state of the UK economy that Bank of England governor Mark Carney in his most recent inflation report asserted that Brexit will not lead to a recession in the UK.
So the path to persistently higher inflation may seem set for years to come.
Yet the decline in the value of sterling has been this pronounced because of the complete uncertainty in markets about the future direction of the UK economy and nation as the country’s exit from the EU nears.
Whatever the outcome of Brexit, with each passing day the quantum of unknowns recedes. Markets tend to dislike uncertainty more than they dislike bad news.
Steven Andrew, who runs the giant M&G Episode Income fund takes the view that while a fall in sterling has been justified, it is currently priced for a deeper and worse outcome than when the IMF had to bail the UK economy out in the 1970s, or when the UK left the Exchange Rate Mechanism (ERM) in 1992, a day that has entered the political lexicon as ‘Black Wednesday.’
With that in mind, Andrew takes the view that sterling could stabilise or rally from here.
That would mitigate against inflation rising substantially beyond the current level.
Julian Chillingworth, chief investment officer at Rathbones Unit Trust Management told What Investment that the current official inflation number is flattered somewhat by the recovery in the oil price from exceptionally low levels, when the previous lows drop out of the system, that slug of the inflation data will move downwards.
Factors that could influence a move upwards for UK inflation include increased levels of public spending, particularly in the US, and the so far better than expected performance of the Chinese economy.
Inflation caused by currency weakness is called ‘cost push’ because it leads to prices rising due to the costs of bringing goods to market going up. So a weaker pound makes oil, which is priced in dollars, more expensive, and that imposes extra transport and production costs on businesses, who pass those on to end consumers.
If those conditions persist it leads to high inflation and slower economic growth, what is often termed ‘stagflation.’
The inflation caused by improved economic conditions and higher bank lending is the result of the demand for goods and services in an economy rising at a faster pace than the supply of goods and services. This ‘demand push’ inflation and generally leads to higher GDP growth and inflation. This is, in the short term at least, ‘good inflation.’
The rising inflation in the US is mostly ‘good inflation’, caused by strong demand, though the ‘bad inflation’ caused by the higher oil price is also relevant.
In the UK, the inflation is mostly ‘bad inflation’ caused by the currency fall, though there is some ‘good inflation,’ as evidenced by the better than expected GDP numbers.
The impacts of both are exagerated by how differently the numbers looked a year ago, and so evens out, albeit at a higher inflation level than a year ago.
It was notable that in the Bank of England’s most recent inflation report predicted a steep rise in GDP this year, but didn’t amend its outlook for inflation.
The central bank expects inflation to hit a peak of 2.8 per cent in 2019, much higher than anything seen in recent years, but hardly oppressive.
It should also be pointed out that the Bank of England has been trying to push inflation up for years, with ultra low interest rates and the policy known as quantitative easing.
In the immediate aftermath of the EU referendum result being announced in June, Mark Carney, cut interest rates. That is designed to be inflationary because it reduces the incentive to save instead of spend, and makes borrowing cheaper.
At that time, Carney and his colleagues were acting to avoid stagflation, by trying to create good inflation to go alongside bad inflation.
Now the view appears to be that those conditions are happening, with both good and bad inflation taking place in the economy.
Looking beyond the next two years, the course of UK inflation will largely be set in the US, and China.
The economic policies of Donald Trump are designed to create inflation, if that happens in an economy the size of the US, it will export rising prices across the globe.
The dollar has hit exceptional levels in recent months, partly as a result of the strong US economy and partly a strong dollar is generally bad for global growth and inflation, as it pushes the real cost of commodities up around the world, and leads to higher borrowing costs.
That is balanced by strong economic performance.
A less predictable path comes if the dollar were to weaken from here. Sammy Chaar, chief economist at Lombard Odier takes the view the dollar is already at an unsustainable level.
A weaker dollar would be positive for growth and inflation around the world, but may signify a weakness in the US economy.
The economy with the capacity to create severe inflation, or deflation in the world is China.
Policymakers in that country are faced with the dilemma that eventually visits all economies which are built on exports.
As the economy grows, either wages or the currency, or both start to rise. That makes the goods and services they sell overseas less competitive, and market share is lost to the next generation of export economies.
Chinese policymakers are intent on moving the economy to the next stage of development, with domestic consumption playing a greater role.
James Syme, manager of the JO Hambro Global Emerging Markets Opportunities fund takes the view that the Chinese government are trying to maintain a level of growth that is unnaturally high.
This is happening through policy makers in that country increasing debt levels, whilst also protecting the value of the currency. That is presently exporting inflation and economic demand to the rest of the world.
Syme opined that this approach is unsustainable and will lead to crisis in the years ahead.
He takes the view that the Chinese currency will ultimately fall, either because it becomes the intention of policy makers to generate more demand for exports, or unintentionally because the economy slows down.
Either outcome would, he opined, mean a very material wave of deflation being exported to the rest of the world, and that would likely be strong enough to swamp any other at factors in the UK economy at that time.
But just as the current cocktail of economic factors are temporary in nature, the longer-term global trends towards deflation haven’t gone away.
Developed economies and China are locked in a battle against ageing populations.
Because the old spend less than the young, and the old are retired and receiving pensions funded by the young, that acts as a drag on both growth and inflation.
Japan is the prototype for this sort of economy. The deflation or very low inflation caused by the impact of ageing populations is ‘bad deflation.’
But stellar investors such as James Anderson of Baillie Gifford and Nick Train, who runs the Finsbury Growth and Income Trust, opine that while deflation is coming, it will be very positive.
They take the view that technological advances are happening at such a rate that costs are being driven down, but far from this being a problem, it will lead to increased purchasing power and economic growth.
James Carrick, an economist at Legal and General opined that this trend was responsible for a lot of economic growth in the late 90s, but that the data takes years to catch up.
Whatever the long-term trajectory of UK inflation, it will be decided by factors far more important than Brexit, indeed far more important than anything as vulgar as the typical politician.