I have been forecasting a move back to an inflationary environment for several years now. The data is now coming through but unfortunately the prognosis is for it to worsen. Stagflationary shocks will accelerate the unraveling of our current world order as we transition to a new world. And just as stagflationary shocks are pushing the major economies into recession, central banks are raising rates at the worst possible time almost guaranteeing the worst outcomes.
Inflation strikes
In a recent report of the Housington quarterly it states:
“Most Americans have suffered a substantial fall in their standard of living over the past 12 months. In the latest available 12-month change, 116.2 million American wage and salary workers suffered a 3.7% decline in their inflation-adjusted paychecks, the largest drop since 1980”
This will continue to shock the world economy. Already the worlds largest economy, the US, has just printed a negative GDP number in the last quarter , announced this week.
Central Banks
So inflation is in the headlines everywhere now. In a recent article in the Economist magazine , the editorial team seems to blame everything on Central banks:
“Central banks are supposed to inspire confidence in the economy by keeping inflation low and stable. America’s Federal Reserve has suffered a hair-raising loss of control. In March consumer prices were 8.5% higher than a year earlier, the fastest annual rise since 1981. In Washington inflation-watching is usually the preserve of wonks in shabby offices. Now nearly a fifth of Americans say inflation is the country’s most important problem; President Joe Biden has released oil from strategic reserves to try to curb petrol prices; and Democrats are searching for villains to blame, from greedy bosses to Vladimir Putin.
It is the Fed, however, that had the tools to stop inflation and failed to use them in time. The result is the worst overheating in a big and rich economy in the 30-year era of inflation-targeting central banks.”
I have long been critical of central bank policy: for creating the biggest monetary policy experiment in history and the greatest bubble ever. This has had unfortunate ramifications for wealth disparities.
It was against the backdrop of colossal money printing that I expected a return of 1970s style inflation. But I didn’t expect it to be the sole cause. I was expecting a new upward cycle in commodity prices based on supply/demand dynamics and the intensification of Cold War 2.0 to contributing to rising energy costs as the geopolitical risk premium rose.
Much of the current inflation is cost push inflation coming from supply shortages and thus raising rates won’t even help.
It turned out that the global pandemic and the policy makers response to it had severe consequences for supply chains.
First we had the disruption to global farming. Already back in 2020 the UN was warning of an imminent food crisis.
Second, the Great Resignation commenced where many workers did not return to work after the initial shock of the pandemic. Either they got used to government handouts or are just living off savings. I can see ‘we are hiring’ signs all over the UK.
Third there has been a retreat from globalization for a number of years , and a reshoring of production. This is the result of the negative effects of Western multinational companies moving all their positions reduction to China and other emerging markets: entire communities across the West have been devastated . This resulted in the politics of Trump and other populists.
Fourth, is the geopolitical factor. This started with a concerted effort to do less trade with China for national security reasons. It accelerated the reshoring tendency above. Naturally this will have ramifications for prices.
But the War with Ukraine has created a fifth factor , which is the sudden dislocation of energy markets. The West has commenced a new World War with a major energy superpower , Russia. Now the entire EU is striving to find new sources of energy given its high reliance on Russia. This will take time and in the interim we are facing energy dislocation worse than anything in the 1970s. This could further worsen if conflict between the West and Rusia / China spills out to something bigger than the proxy war in Ukraine.
The war is also exacerbating the food crisis: Russia, Ukraine and Belarus are major commodity producers in other products like fertilizers.
Climate change , or what I call the ecological crisis, make the sixth factor in driving stagflationary forces. Climate change is inflationary as agricultural harvests will be poorer going forward. Even before the Ukranian war we were seeing worsening yields across key agricultural suppliers.
Then the seventh factor is global demographics. Major economies like China are seeing their populations age considerably and this reduce the potential workforce pool and hence push up la our costs.
The prognosis is that inflation will continue to push up.
The most recent data in the US show that inflations expectations continue to worsen. I expect the rift between the powers of USA and Russia/China to intensify. This week’s news than Scandinavia plans to join NATO will only add fuel to the fire. And future signals suggest that food inflation will only worsen. I expect rationing to occur across many counties in the not too distant future.
It also seems to me that we are in the end game of the biggest bubble in financial history.
If you look at some of the higher risk assets in recent weeks they are acting as the canary in the coalmine. The value of crypto markets fell an entire trillion dollars in recent weeks, with Bitcoin falling 50%!
Ultimately if we survive all these shocks, the very shocks might act as further catalysts to the creation of a more resilient civilization , what I call an ecological civilization. This is something much more positive and uplifting I will want to address in the coming months.
University of Michigan survey : Price Expectations