Why Warren Buffett just rang the alarm bell on inflation 

With the US economy running ‘red hot’, the world’s most famous investor has this warning for us all. 

It's a measure of these extraordinary times that even legendary billionaire investor Warren Buffett has been caught out by how the pandemic recovery has developed.

The 90-year-old told shareholders in comments to Saturday’s online Berkshire Hathaway (NYSE:BRK.B) annual meeting that the US economy is “red hot” and that “we weren't expecting it”.

His conglomerate should be well placed to take the pulse of the US economy, given that it holds stakes in Wall Street giants, ranging from battery maker Duracell to food giant Kraft Heinz, and also owns more than 90 businesses, including railroad and manufacturing operations.

Buffett said: “We're raising prices, people are raising prices to us. And it's being accepted.” He added: “We really do a lot of housing. The costs are just up, up, up. Steel costs. You know, just every day they're going up."

The comments by the Sage of Omaha come as mining and oil stocks have raced higher this week on renewed speculation that we're at the start of a commodities supercycle.

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China's surging economy, the Covid stimulus measures being undertaken by the US and other governments and the heavy investment needed for green technology, have recently sent prices of commodities such as copper and palladium to multi-year highs.

Glencore (LSE:GLEN), BHP Group (LSE:BHP) and Rio Tinto (LSE:RIO) were among mining stocks more than 2% higher in a robust start to the week for the London market today.

Buffett is worried share valuations may be impacted if the US economy shows signs of overheating, and policymakers at the Federal Reserve respond by raising interest rates.

The Fed is so far showing signs of holding its nerve, having expressed its desire to give inflation an initial free rein in the interests of achieving employment objectives. Fed chairman Jerome Powell also noted yesterday the US economy is “not out of the woods yet”.

Strong demand and constraints in supply mean the central bank's base case is for pricing pressures this year but with inflation poised to subside next year. One ongoing factor noted by Buffett at the weekend has been that inflation is also reflecting the release of savings built up last year, when consumers had little to spend on due to the Covid-19 restrictions.

Another world famous investor hedges against inflation

Star investor Bill Ackman shares the concern of Buffett over the potential threat posed by benign monetary policy in the United States, particularly if confidence triggered by a successful vaccination programme fuels demand for wage rises.

Ackman, the founder and CEO of Pershing Square Capital Management, told interactive investor last week: “The US is approaching full employment much faster than people expect. Education and hospitality industries are all coming back very very quickly, by September or later in 2021.

“The turn of the calendar year could be full employment and near all-time low unemployment rates. Those are the triggers for the Federal Reserve changing policy. You could see expectations change as soon as the next few months about how accommodative the Fed could be.”

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Global markets have already had a taste of inflation jitters after yields on bonds jumped earlier this year to reflect growing expectations of higher interest rates. Tech stock valuations were particularly impacted as inflation makes their future cash flows appear less attractive.

This inflation fear even led Ackman to take out a big hedge earlier this year against a “Black Swan” event involving a large and prolonged rise in prices.