When I read that the CEO of Heineken, Dolf van den Brink said to the FT today that “ There’s no model that can handle this kind of inflation. It’s kind of off the charts” it makes you think.
Couple this with a customer of ours in Europe, installing a very large production line with an installation spread over 9 months saying to me the cost of stainless steel from Germany is only valid for 4 days, then will have to requote! It hits home.
Inflation has been off the radar for so long, but now is back, and I think it will remain with us for all of this year and possible most of next year.
In the UK inflation is now at a 30 year high at 5.5%, and I suspect will hit slightly north of 7 % before it will start to drop. The drop will not be a sharp as some politicians would suggest, looking historically, from the period 1988 to 1992, it went from 4.16% in 1988 to 5.76 the following year before peaking in 1990 at 8.6% . The following year 7.46 % before in 1992 dropping to 4.59 % .
I suspect that with outside pressures of energy and political uncertainty, and the general rising of raw materials coupled with logistical problems, inflation will be with us all for perhaps a couple of years before falling back to the 2% B of E target.
This is not just a UK problem, Europe are experiencing exactly the same problems. With Reuters stating that Austria imports 80% of its natural gas from Russia, as an example, we are all in the same boat.
With inflation rising, the B of E and the ECB will have to raise their base rates in an effort to cool inflation, which in this climate is a very difficult balance.
Is there an upside to this? Partially, a lease is a fixed rental over the chosen period of the agreement. As inflation rises, the real cost of the rental diminishes, and with bank rates still at historical lows, to miss out on this opportunity seems to be a “no brainier”.
To put this into perspective, as an example , from January to date, Oak has written over 58 leases in Europe, and by the end of the month, this should hit 70! With many multi million projects currently running in both the UK and Europe, it seems that I am not the only one thinking this is a golden time to lease!
The question I will ask, is your glass half full or half empty!