Things that caught my attention this week.
The market has given up on the concept of "temporary" inflation or at least temporary inflation in the United States. The US consumer price index rose by only 6.2%—the highest increase since 1990—and alternative measures that removed everything Americans really wanted to buy also showed price increases.
Some opponents still believe that this may be a US problem. They are counting on more generous fiscal stimulus measures in the United States. They said that Europe and Asia may still avoid price spikes. But this seems unlikely to me.
Prices in the UK have risen, and inflationary Brexit issues — border frictions and staff shortages — are piling up on global trends.
More generally, Covid and wave after wave of economic shutdowns have occurred on a global scale. And these interruptions are exactly what caused the price increase.
Our best hope-I have held it all year round, but still hasn't given up completely-is that as we get through the worst of Covid, inflation should ease. With deflationary forces gaining the upper hand again, some price increases may even reverse.
However, I reluctantly believe that higher prices may continue for some time.
And this is mainly because they are already insisting!
The more we see price increases, the more companies and consumers expect prices. The company will increase prices as much as possible, and we will strive to increase wages to keep up with the pace.
In short, this is what they call spiral inflation.
We better hope that it will not get out of control.
Should the central bank raise interest rates faster in response to price increases? Recently, the US bond market has been slightly affected by the rapidly changing calculations associated with this.
However, I don't believe that the boss banker should be anxious.
Let us think about why our prices will rise today.
Back to the beginning of Covid awareness-late February to March 2020-there is no consensus on how countries should respond to the threat.
Long-time readers may remember that I was cautious about forcing a complete shutdown of the economy. Indeed, this seems to have worked in China. But China only needs to close one province completely, and I am worried about the consequences of closing the country. I want to know whether Westerners will obey such orders. If they do this, it will have a major blow to GDP—and more importantly, it will cause some lasting economic losses (or "scars").
As the second wave of COVID-19 spread in the UK in the late summer of 2020, I gave up my side job as a freelance epidemiologist. Obviously I misread some early data. Besides, the experts are right-Covid will be with us for a while. Wishful thinking is useless.
Nonetheless, when the first vaccines came out in the fall of 2020, this period seemed to be shortened. Especially when their efficacy data is better than anyone expected.
Since then, the vaccine situation has become more obscure. They have done a good job in preventing deaths and reducing hospitalization. But—perhaps because of the emergence of delta variants—their work to contain the spread is even more limited. To make matters worse, more than 100 people still die from the coronavirus every day in the UK, including many who have not been vaccinated. This painting is very similar all over the world. All of this will have an impact on our economy and thus on inflation.
The continued Covid has led to a pattern in most countries, with a wave of infections, some degree of lockdowns and restrictions, and then a period of economic activity rebounding. This is in contrast to the ever-increasing number of vaccinations (which rightly makes people feel safer) and natural infections (which may not be, but end up with the same antibodies).
It seems that the outcome of the pandemic is likely to be that most people in most countries have been vaccinated, but the virus has never disappeared. During the Nth wave, many of us will encounter Covid again in the wild, but after repeated vaccination and low-level infections, we may not be affected much. New drugs for the treatment of infections will also be on the market soon. Eventually, as enough people are exposed, possibly multiple times, Covid gradually fades out of the background. Fortunately, it will not erupt into something more deadly or contagious.
One reason for this fatalistic attitude is what is currently happening in Europe.
In the past few months, people have been asking why we can’t be more like Germans, for example, they seem to avoid triangle waves. In recent days, despite the new wave in Europe:
It is true that the vaccination rates in Germany and Austria are not particularly high. There may be other local factors.
However, there really doesn't seem to be much space between the most extreme measures-such as China's zero tolerance-and trying to vaccinate as much as possible, and then open and operate as we have done.
Anything smaller than the fortress isolation, it seems that Covid will come to you sooner or later. After that, it boils down to managing peak numbers to prevent hospital pressure.
The Netherlands has even re-entered a partial blockade.
Back to inflation and the impact of Covid on the economy. With the development of the aforementioned pandemic, what we have seen in the past 22 months are:
Covid and measures to limit its spread have caused tremendous damage to the supply chain and work practices.
Some people think we can shut down the economy and then turn it back on again with little impact. It's almost like moving a cell in a spreadsheet from column A to column B.
In fact, this has already happened at the overall level. Although at the cost of accumulating a large amount of national debt, this kind of "fake death" is possible. (Including vacation payment, etc.).
GDP seems to have recovered sharply from blockades in most countries. Even in places where a lot of jobs have been lost, such as in the United States, the vast majority of people who want to work have now found jobs again.
However, when you look at the weeds, it's not exactly like the cell copy and paste process.
Maybe I spent 20 years reading company reports, but I firmly believe that shutting down the economy will put the global economy into trouble to some extent. Today's companies are so efficient that they will be disrupted by almost anything, and they are happy to explain this to shareholders. So I know very well that suppliers and customers blinking unpredictably like the global game of wac-a-mole can cause trouble.
In this stopped economy, if you need one or another product or component to complete your product and meet the needs of consumers that are recovering, you will pay for it. Maybe a lot. Since you can pass on at least part of the cost to greedy new consumers, you can do it. Therefore the price rises.
Nonetheless, I believe this will be a one-off impact, which will be resolved within a few months. But I was wrong. The wave after wave of Covid and those on/off restrictions mean that different parts of the economic tapestry are offline at different times. Therefore, the destruction continues, perhaps overshadowed by the noisy overall GDP data.
There are other factors. If you are curious, I will let you have a Google, but the biggest problem is obviously the labor shortage in many western markets.
Some people leave the workforce very early—that is, great resignations. Others don't want to do what they have done before, they have reassessed their lives for a year on the couch. (Put the service personnel into this bucket). Some people are still afraid of getting sick. The lucky few may have made so much money from rising asset prices that they no longer need work.
Interest rates close to zero are also a marginal factor. For many ordinary people, saving seems to be a waste of time. It is true that interest rates have been low for a long time, but in any case, many people have not had any savings for most of the past ten years, so they are not wise.
Now they do have cash — from government support and mandatory lockdown — and they have little incentive to save money.
The rich have saved too much (arguably yes), but I noticed that after Covid, many people are now more willing to flash extra cash on the edge. Of course, my wealthier friends will travel this summer almost at all costs. Even my recent excursion to Cornwall overpaid.
So basically we have more people and more money to chase goods and services that are more expensive to manufacture, because someone in a certain part of the world cannot make or do other things, or don't want to buy things made by others.
The problem is that it is difficult to see that this situation will change soon. That's because Covid continues to be felt globally.
Companies will do a better job in adjusting the supply chain flexibly-they have already done so-but there is a limitation, and it will cost money anyway. This in itself is the secret of price increases a few months later.
Then, as we return to normal, you will recoup rent (applicable to various landlords) and other delayed inflation increases. (Although from a CPI perspective, some of these problems will soon be alleviated as the low point of the recession in 2020 falls out of the statistics.)
I suspect this is why the Bank of England and the Federal Reserve have not raised interest rates yet. The more expensive money they make on top of everything else will not solve the interruption problem. It is conceivable that higher interest rates may make the situation worse.
In other words, the central bank is very clear that they cannot let this situation get out of control. Raising interest rates will curb demand, even if it does not help the supply situation. Therefore, we can be pretty sure that they will eventually take action—perhaps when they believe that the economy is stable enough to withstand the shock.
Maybe we all agree not to ask for a raise? This is our best option to avoid long-term high inflation-thus avoiding higher interest rates, which will do wonders for our cash deposits, but crush bonds and may also hit high-value stocks.
how about this? Collective sacrifices for long-forgotten statistics like CPI?
Yes, neither do I. It’s best to wear a seat belt to deal with bumps...
...Or hope that all these worries become a consensus, which means that we are actually at the peak of inflation worries? Maybe when the Fed blinks—everyone is paying attention to inflation—it’s time to buy 10-year bonds instead!
I wish you a nice weekend.
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