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 still believe this could be 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 issues – border friction and staffing shortages – are piling on top of the global trend.
More generally, Covid and waves of economic shutdowns happened globally. And those disruptions are what’s caused these rising prices.
Our best hope – which I’ve held all year, and 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 take hold once again.
However I’m reluctantly coming around to the view that higher prices may persist for a while.
And that’s mainly because they are already persisting!
The more we see rising prices, the more companies and consumers alike expect more of the same. Companies will increase prices where they can, and 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 interest 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 be in a big 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 tackle the threat.
As long-time readers may remember, I was wary of mandating blanket economic shutdowns. True, that had seemed to do 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. If they did, there would be a big hit to GDP –and more importantly some lasting economic damage (or “scarring”).
As it became clear a second wave of Covid was coming in the UK in 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 first vaccines arrived in Autumn 2020. Especially when their efficacy data was better than anyone expected.
Since then the vaccine picture has got murkier. They have done a great job preventing death and reducing hospitalization. But – perhaps because of the emergence of the delta variant – they have done a more limited job in curbing transmission. Worse, more than 100 people are still dying of coronavirus every day in the UK, including 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 an ever-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).
It’s looking likely the pandemic endgame is 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 infection 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 happening in Europe right now.
For the past few months people have asked why we 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 Covid will come and find you out, sooner or later. After that it comes down to 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 above pandemic has played out is:
Consumers save a lot when in lockdown
Most are happy to start spending 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 measures to 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 on a lot of national debt to make this ‘suspended animation’ possible. (With furlough payments and the like).
GDP seems to recover 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 the global economy up 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 to me that suppliers and customers unpredictably blinking on and off like a globalized game of wac-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 up for it. Perhaps a lot. Since you can pass at least some of the cost on to newly-ravenous consumers, you do. Hence rising prices.
Still, I believed this would be a one-off shock that would soon 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 are going 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 have a 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 couch for a year. (Put serving staff into this bucket). Some people are still scared of getting sick. A lucky few have maybe made so much from rising asset prices 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 make or do something else, or didn’t want to buy what someone else made.
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, and anyway it costs money. Which 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. (Though some of this should soon 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 still aren’t raising interest rates. Them making money more expensive on top of everything else won’t do anything to solve disruption problems. Much higher rates could conceivably make it much worse.
That said, Central Banks are well aware that 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 fear becoming the consensus view 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 bonds!
Funny things, markets.
Have a great weekend everyone.
How to complain about a financial provider – Monevator
FIRE update: six months in – Monevator
From the archive-ator: How gold is taxed – Monevator
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1
US inflation hits its highest level since 1990 at 6.2%… – Sky News
…while crisps and soft drinks lead a surge in UK food prices – Guardian
Brexit: UK looks likely to trigger Article 16 – BBC
Disadvantaged graduates earn half as much as privileged peers in first job – Guardian
Could tougher EPC regulation hit the price of Britain’s Victorian homes? – ThisIsMoney
“We lost festive savings in family WhatsApp scam” – BBC
It’s time to scoop up cheap UK stocks, says JP Morgan – Market Watch
Products and services
Investment trusts rediscover their roots with a 21st century twist [Search result] – FT
Is Bitcoin now too big to fail? – Institutional Investor
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
Seven things you should know about Junior ISAs – Which
Venerable dealer Stanley Gibbons touting co-investment into world’s most valuable stamp – Showpiece
Uber raises London fares by 10% in effort to lure back drivers – Guardian
Another article on the ins and outs of heat pumps – ThisIsMoney
Homes with great walks on the doorstep, in pictures – Guardian
How NFTs create value – Harvard Business Review
You nowadays need to buy a basket of crypto assets – Fred Wilson
NFT games are a tax-filing nightmare [US but relevant] – Protocol
Comment and opinion
What it’s like to grow up in a FIRE family – Budgets are Sexy
You are what you eat, and invest – Incognito Money Scribe
Index funds track the ‘investable’ half of markets – Pragmatic Capitalism
Asset allocation when you have enough – Morningstar
When cash is king – Humble Dollar
How to invest when inflation is high – Of Dollars and Data
When the living is easy – Banker on FIRE
Taxing – Indeedably
Remembered: first steps on a nine year march to FIRE – A Purple Life
Do interest rates matter more to the economy or the stock market? – AWOCS
The mirage of direct indexing – Enterprising Investor
Naughty corner: Active antics
Institutional investors don’t care about gold anymore – Klement on Investing
Valuing Tesla. Again. – Musings on Markets
Investing lessons from the Stoics – The Undercover Economist
Long-term investors must make a Ulysses pact – Behavioural Investment
The return of the return gap: Ark Innovation edition – Morningstar
A candid account of some less-than-stellar investment trust trading – Getting Minted
The Covid [treatment] drugs are finally here [Search result] – FT
Over 11 million booster shots now given in Great Britain – UK Gov
Kindle book bargains
Exponential: How Accelerating Technology Is Leaving Us Behind by Azeem Azhar – £0.99 on Kindle
Happy Sexy Millionaire: Unexpected Truths about Fulfilment, Love, and Success by Steven Bartlett – £0.99 on Kindle
Billion Dollar Loser: The Epic Rise and Fall of WeWork by Reeves Wiedman – £0.99 on Kindle
Liar’s Poker by Michael Lewis – £0.99 on Kindle
Climate talks into overtime as nations near deal – BBC
Where to find an extra £20,000 for an electric car, and other COP 26 questions – BBC
The enormous hole that whaling left behind – The Atlantic
Turning cities into giant sponges to embrace floods – BBC
Off our beat
Experts from a world that no longer exists – Morgan Housel
Truth is elusive, but it isn’t evasive – Seth Godin
Will Johnson’s Global Britain ever escape the shackles of Brexit? – New Statesman
Things nobody ever tells you about making friends in adulthood – Art Of Manliness
“Like the old miners, coal has almost completely disappeared from our lives.”
– Jeremy Paxman, Black Gold: The History of How Coal Made Britain
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Why inflation is starting to look sticky. Plus the rest of the week’s good reads…
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