Federal Reserve complacency over US inflation risks looks wrong

Many investors are right to wonder if the ultra-low interest rates they have been semi-promised until 2023 will materialise

Last modified on Wed 12 May 2021 15.01 EDT

Statistical quirk or a warning of a fundamental change in the inflationary weather? We know on which side of the debate the US Federal Reserve will land. It will take the relaxed view that the sharpest monthly rise in US consumer prices since 2008 – 4.2% – is nothing to worry about.

The Fed is committed to keeping interest rates at rock-bottom levels into the middle distance on the grounds that an economy in recovery mode is bound to throw up a few odd-looking pieces of data. Inflation fell a year ago at the onset of the pandemic, so one should not be misled by so-called “base effects”, goes the argument. Don’t risk the recovery by reacting.

That line of thinking is, of course, credible and has recent history on its side – none of the inflation scares in the past decade materialised. In this case, one could add that unemployment in the US is still high at 6.1%, so there should be slack in the labour market to keep a lid on wages. And, if bottlenecks in global chains are contributing to a flurry of higher prices, companies may eradicate them once they are able to operate normally again.

Convinced? It’s too soon to make definitive judgments, but a complacent view of inflation risks already looks wrong.

A boom in commodity prices is in full swing. Stock markets and house prices (in the UK, as well as the US) are already in inflation mode. US companies are talking about difficulties in hiring new staff. Washington is about to crank up its enormous (and much-needed) infrastructure programme. If you own a restaurant that has struggled to get through the past year, why wouldn’t you try your luck and see if the customers will pay more?

This debate could turn very quickly. All it would take is a couple more months of data like Wednesday’s. Investors are starting to wonder if the ultra-low interest rates they are being semi-promised until 2023 will really arrive. It’s the right question because the answer is becoming less clear by the week.

Renishaw founders seek virtuous bidders with deep pockets

Wanted: buyer of high-class UK engineering company. Must commit to big research and development budget. Carve-up merchants and private equity vultures need not apply.

That, more or less, was the unusual pitch made in March by Sir David McMurtry and John Deer, founders of Renishaw, a maker of ultra-precise measuring equipment that has been quietly but spectacularly successful over the years. The company, based in Wotton-under-Edge in Gloucestershire, is one of the few to make the long journey from the junior Alternative Investment Market to the FTSE 100. It is valued at £4bn.

McMurtry and Deer own 53% between them and, having reached their 80s, want to sell up. But they don’t wish to hand their creation to just anyone. Would-be bidders were told they would have to “recognise the value of Renishaw as an innovation-led business and respect the unique heritage and culture of the business, its commitment to the local communities in which its operations are based”.

Predictably, virtuous bidders willing to pay high prices are hard to come by. Bloomberg reported this week that many obvious candidates, including Schneider Electric of France and Siemens of Germany, are out of the race. Some are said to have been deterred by price – Renishaw is valued at 40-odd times earnings. Some have been put off by the “heritage and culture” clause, which is taken to mean a solid pledge to maintain Renishaw’s generous approach to investment spending.

The result is that the Renishaw share price is now lower than when the fun started. The share price shot up from £58 to £70 on the March announcement but has retreated to £54.30.

McMurtry and Deer seem serious about selling only to an owner that meets the strict criteria, and they obviously don’t need to chase every last million themselves. On the other hand, they can’t completely ignore the wishes of minority shareholders, some of whom would presumably want to open the auction to all-comers. One hopes the duo stick to their plan – their stance is refreshing.

What now for pay revolts?

After the excitement of the 40% protest over pay at AstraZeneca, normal pusillanimous service from the fund management industry was restored on Wednesday.

The estate agent Savills had been awarded “red top” alert status by the Investment Association on account of some sharp manoeuvres on executive bonuses, versus the mere “amber” for Astra, but the investors either missed the signal or didn’t agree with it. The rebels mustered an unimpressive 21%. It is a reminder that, for all the huffing, the pressure on remuneration committees tends to be weak.

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