What caught my eye this week.
The markets are throwing in the towel on the notion of ‘transitory’ inflation, or at least transitory US inflation. The US consumer price index just jumped 6.2% – the most since 1990 – and alternative measures that strip out everything that Americans actually want to buy show rising prices, too.
Some holdouts believe this is an American issue. They finger more generous fiscal stimulus in the US. Europe and Asia might yet avoid surging prices, they suggest. But that doesn’t seem likely to me.
Prices are already up in the UK and inflationary Brexit impacts – border friction and staffing shortages – are piling on top of the global trend.
More generally, Covid and waves of economic shutdowns happened globally. Those disruptions are what’s causing rising prices.
The best case – which I still haven’t totally given up on – is that inflation should ease as we get past the worst of Covid. Some price rises may even reverse as deflationary forces prevail again.
However I’m coming around to the view that higher prices may persist.
And that’s mainly because they are already persisting!
The more we see rising prices, the more companies and consumers expect more of the same. Companies will increase prices where they can. We’ll try to get pay rises to keep up.
That in a nutshell, is what they call spiraling inflation.
We best hope it doesn’t get out of hand.
Keep on keeping on
Should Central Banks be quicker to raise rates in response to rising prices? The US bond market has been mildly roiled recently by fast-shifting calculations concerning exactly that.
I’m not convinced the boss bankers should hurry, however.
Let’s think about why we have these rising prices today.
Back at the beginning of Covid consciousness – late February to March 2020 – there was no consensus as to how nations should or would tackle the threat.
As long-time readers may remember, I was wary of mandating blanket economic shutdowns. True, that had seemingly done the trick in China. But China had only needed to totally switch off one province, and I feared the consequences of shuttering countries. I wondered if Westerners would even submit to such mandates. And if they did, there would be a big sudden hit to GDP – as well as some lasting economic damage (or ‘scarring’).
As it became clear a second wave of Covid was coming in the UK by late summer 2020, I gave up my side hustle as a freelance epidemiologist. It was clear I’d misread some of the early data. Moreover the experts were right – Covid would be with us for a time. No use in wishful thinking.
Nevertheless, that time looked truncated when the vaccines arrived in Autumn 2020. Especially when their efficacy data was better than anyone expected.
Since then though the vaccine picture has got murkier. Vaccines have done a great job preventing death and reducing hospitalization. But – perhaps because of the emergence of the delta variant – they have done less well curbing transmission. Worse, more than 100 people are still dying of coronavirus every day in the UK. That includes plenty of unvaccinated. The picture is similar the world over. This all has consequences for our economies, and hence inflation.
Persistent Covid has led to a pattern in most countries of waves of infection, some measure of lockdown and restriction, and then periods of rebounding economic activity. Set against that is a rising count of vaccinations (that has rightly made people feel safer) and natural infection (that probably hasn’t, but has ultimately conferred the same antibodies so should).
It’s looking likely the pandemic endgame is that most people in most countries get vaccinated, but the virus never vanishes. Many of us will encounter Covid again in the wild during an Nth wave, but we may not be much affected after repeated vaccinations and low-level infection. There are good new drugs to treat infections coming on-stream, too. Eventually, Covid fades into the background as enough people have been exposed, perhaps multiple times. With luck it doesn’t flare up as something deadlier or even more infectious.
One reason for this fatalistic attitude is what’s going on in Europe right now.
For the past few months people have asked why the UK can’t be more like the Germans, say, who had seemed to have avoided a delta wave.
In recent days though a new wave has taken off in Europe:
True, the vaccination rate isn’t especially high in Germany and Austria. There may be other local factors, too.
But there really doesn’t seem much room between the most extreme measures – China’s zero-tolerance say – versus trying to vaccinate as many as you can and then opening up and running hot, as we’ve done.
Anything less than fortress isolation and it seems that (delta) Covid will find you out, sooner or later. After that it’s about managing peak numbers to prevent pressure in hospitals.
The Netherlands is even going back into a partial lockdown.
Keep on pushing
Back to inflation, and Covid’s impact on the economy. What we’ve seen over the past 22 months as the pandemic outlined above has played out is:
- Consumers save a lot when in lockdown
- Most are happy to spend when restrictions ease
- This has led to wild fluctuations in the savings rate
- It’s also left companies by turns over and under-estimating demand
There has been huge disruption to supply chains and working practices caused by both Covid and by the measures that restrict its spread.
Some people believed we could switch off the economy and then on again with almost no impact. Almost like moving one cell in a spreadsheet from column A to column B.
And indeed, this has sort of happened at the aggregate level – albeit at the cost of a piling up a lot of national debt to make this ‘suspended animation’ possible (via furlough payments and the like).
GDP recovers sharply from lockdowns in most countries. Even where a lot of jobs were lost, such as in the US, the vast majority of those who want work have now found it again.
However it has not been exactly like that cell copy-and-paste process when you look into the weeds.
Maybe I’ve spent 20 years too long reading company reports, but I was adamant that turning off the economy would snarl up the global economy to some degree. Today’s companies are run so efficiently they get disrupted by almost anything, and they happily make this plain to shareholders. So it was clear that suppliers and customers unpredictably blinking on and off like a globalized game of Whack-a-mole would cause trouble.
In this stop-go economy, if you need this or that commodity or component to finish your product and meet recovering consumer demand, you will pay more for it. Perhaps a lot. Since you can pass at least some of the higher cost to newly-ravenous consumers, you do. Hence rising prices.
Still, I believed this would be a one-off shock that would get sorted in a few months. But I was wrong about that. The rolling waves of Covid and those on/off restrictions mean different bits of the economic tapestry continue to go offline at different times. So the disruption continues, perhaps hidden by what’s captured in noisy overall GDP figures.
There are other factors, too. I’ll leave you to Google if you’re curious, but the biggie is obviously a labour shortage in many Western markets.
Some people left the workforce early – aka the Great Resignation. Others don’t want to do what they did before, having reassessed their lives from their comfy couch for a year. (Put service staff into this group). Some people are still scared of getting sick. A lucky few have maybe made so much from rising asset prices of all descriptions that they don’t need to work any more.
Near-zero interest rates are a factor at the margin, too. To lots of everyday people, saving seems a waste of time. True, rates have been low for a very long time, but many people didn’t have any savings for much of the past decade anyway, so they were none the wiser.
Now they do have cash – from government support and enforced confinement – they see little incentive to save it.
The wealthy already save too much (arguably), but I notice many are now happier to flash extra cash at the margin, post-Covid. Certainly my richer friends have paid almost any price to travel this summer. Even I overpaid for my recent jaunt to Cornwall.
It all adds up.
People get ready
So basically we have more people with more money to spend chasing goods and services that cost more to make because someone somewhere in the world couldn’t or wouldn’t make or do something else, or didn’t want to buy what someone else made.
Simple, eh?
The trouble is it’s hard to see this situation changing anytime soon. That’s because Covid continues to be felt across the globe.
Companies will get better at flexing their supply chains – they already are – but there’s a limit. Anyway, it costs money. That is itself a recipe for higher prices a few months from now.
Then you have recovering rents (for landlords of all sorts) and other postponed inflationary hikes as we return to normal. (Some of this should be eased from a CPI perspective by the 2020 recession lows falling out of the statistics.)
I suspect all this is why the Bank of England and the US Federal Reserve aren’t yet raising interest rates. Making money more expensive on top of everything else won’t do anything to solve short-term disruption problems. Much higher rates could make it much worse.
That said, Central Banks know they can’t let this get out of control. Raising rates will curb demand, even if it doesn’t help the supply situation. So we can be pretty sure they will act eventually – probably once they believe the economy is sufficiently settled to take the shock.
Maybe we can all agree not to ask for a pay rise? That’s our best bet for dodging embedded long-term higher inflation – and consequently much higher interest rates, which would do wonders for our cash deposits but smash bonds, and likely also hit richly-valued shares.
How about it? A collective sacrifice for the good of a long-forgotten statistic like CPI?
Yeah, me neither. Best buckle up for a bumpy ride…
…or else hope that all this inflation fear becoming the consensus means we’re actually at the peak of inflation concerns? Maybe when the Fed blinks – and everyone is all-in on inflation – it’ll be time to contrarily buy 10-year Treasuries?
Funny things, markets.
Have a great weekend everyone!
