The bond market’s pulse quickened on Monday as a spectre of inflation, fuelled by Donald Trump’s protectionist zeal, stalked global markets. For those of us who remember the 1970s, the pattern is familiar: a US president chasing easy growth, the Federal Reserve scrambling to catch up, and the rest of the world paying the price. Now, with UK gilt yields already creeping higher, the question is whether Britain can insulate itself from the fallout.
Trump’s rhetoric has been unambiguous. He tweets about high prices being a ‘beautiful thing’, a statement that would send any central banker reaching for the blood pressure pills. The man sees inflation not as a cancer on purchasing power but as a sign of ‘strength’. This is the logic of a property developer who has never met a rising asset price he didn’t like. But for the global economy, it’s a poison.
The mechanism of contagion is simple. If Trump’s fiscal stimulus and trade tariffs push US inflation above target, the Federal Reserve will be forced to raise rates faster. Higher US rates attract capital flows, sucking liquidity from emerging markets and pressuring currencies from the rupee to the real. The pound, already buffeted by Brexit uncertainty, would not be immune. A stronger dollar makes imports costlier for UK consumers, driving up inflation at a time when the Bank of England is already struggling to keep CPI within its 2% target.
But the real danger lies in long-term bond yields. If US Treasuries become the only safe haven in a world of inflation fears, investors will demand a premium for holding UK gilts. The yield on the 10-year gilt has already climbed 20 basis points this month, a significant move in a market that usually moves in increments. This is not a mere technical adjustment; it is a vote of no confidence in the Bank of England’s ability to anchor inflation expectations.
Meanwhile, the government’s fiscal position remains precarious. The Office for Budget Responsibility has warned that a one percentage point rise in gilt yields would add £20 billion to the annual debt servicing bill. That is money that could be used for health, education or infrastructure. Instead, it will flow straight into the pockets of bondholders. This is what happens when you have a ‘love of inflation’ at the heart of the world’s largest economy.
The irony is that Trump’s policies are self-defeating. A weaker dollar might help US exports temporarily, but it also raises import costs, feeding the very inflation he seems to adore. And once inflation expectations become unanchored, they are devilishly hard to resubdue. Ask any Bank of England veteran about the battle to restore credibility after the 1970s inflation. They will tell you it took years of above-trend unemployment and a brutal recession.
For now, the UK’s best defence is the Bank of England’s independence. Unlike the White House, Threadneedle Street is not in the business of tweeting about the beauty of inflation. Governor Andrew Bailey has been clear that rates will rise if necessary, even if that means braking the recovery. But that defence is only as strong as the market’s belief in it. If Trump’s inflation contagion spreads, the bank may have to act more aggressively than anyone expects.
The bottom line is this: inflation is not a toy. It is a tax on savings, a thief of real incomes, and a destroyer of economic stability. Trump may think he is playing with fire, but it is the rest of us who will get burned.
