Are you worried about inflation? You are not alone. A survey by Aegon shows that 64 per cent of people are concerned about the impact of rising inflation on their finances.
The British Chambers of Commerce's latest quarterly report shows that 59 percent of companies expect prices to increase over the next three months, and 66 percent think inflation is a concern. Both of those numbers are new highs.
What is the driver? Some 30 per cent of firms said pay settlements were part of it, but 94 per cent blamed raw materials.
In the UK, wholesale gas prices are five times what they were a year ago, something that will hurt the cash flow of every household.
The average European household will spend about 1,200 on electricity and gas in 2020 and will go up to 1,850 by the end of 2022, according to the Bank of America.
It is unlikely that next year will be better. Energy prices will go up. Why? Too many governments have jumped the gun on renewable energy because they think we can phase out fossil fuels in favour of unreliable renewable energy more quickly than we actually can.
One fund manager tells me that a decarbonisation shock could cause as much pain as the Opec-driven oil shocks of the 1970s. This should make you angry with the green campaigners who forced fossil fuel divestment a decade too early, and argued for the green levies on energy bills.
There is some relief in the EU's acceptance that natural gas and nuclear energy must be part of the transition. At least for now, prices will keep rising. It is a simple matter of supply and demand.
Capital spending on new oil and gas production projects is 75 per cent lower than it was at its peak. The demand for oil keeps rising even though global demand for thermal energy sources has barely declined.
JPM expects global oil demand to grow by 3.5m barrels per day in 2022, ending the year at a record high. There will be a new record high in 2023, and I am afraid of inflation. The research teams at JP Morgan expect oil prices to range from $80 to $125 a barrel in the year 2022. The world is trying to transition to energy independence. Good intentions can come at a high price. There is no exception here.
The relationship between oil prices and the S&P 500 can be used to forecast bull and bear markets.
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Merryn Somerset.
While it is easy to get hung up on gas bills and pump prices, rising energy prices may impact your long term wealth way more than they do your short term cash flow.
Why? The basis of most economic activity is the transformation of energy into goods and services. It makes sense how much it costs and how efficient we are in transforming it into key variables when it comes to stock market valuation.
Charles Gave says that you can use the relationship between oil prices and the S&P 500 to forecast bull and bear markets. Gave says that all structural bear markets in the US have started when the S&P 500 was overvalued.
In 1912, 1929, 1968 and 2000 this was the case. The future cost of energy and the future profitability of listed companies were underestimated in each of those years.
The bear markets of 1929-34, and the ones before that, took place with inflation on the up and lasted as long as inflation persisted.
It makes sense if you think of it in terms of rising energy prices pushing up costs and companies not being able to add value or improve efficiency fast enough to absorb the costs without raising prices or suffering collapsing profits.
The first causes inflation and causes a fall in demand, so either way, stocks with low energy costs baked into the models begin to look overvalued.
There is one more point to be made here. Cheap goods from China have been one of the disinflationary impulses in the west for the past few decades. The goods were cheap partly because they were made with cheap labour and also because they were made with the cheapest thermal fuel there is.
That is also shifting. Coal will make up 20 per cent of China's energy mix by the year 2026. This is not certain, but you can see which way things are going.
The point is that energy prices matter more than you think. Gave says bull markets start when energy is cheap. When it is not, bear markets start. These times are good.
Investment implications are clear. Energy stocks did well last year. They are likely to do the same this year. Their strength may be seen in weakness elsewhere.
You need to hedge the former with the latter. The simplest way to get exposure to oil and gas in the UK is with an exchange traded fund. If you want to hedge your energy bets, you can look at the Temple Bar Investment Trust, which is 33 per cent invested in old energy, or the BlackRock Energy and Resources Income Trust, which is 15 per cent invested in old energy.
MoneyWeek has an editor-in-chief. The views expressed are personal.
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