Inflation: The New Story
Summary
- Surprise, surprise, inflation is rising.
- The expectation that the rising inflation is just temporary is just temporary.
- And the situation is global.
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The following chart tells it all.
Martin Arnold writes in the Financial Times: "Inflation in the eurozone rose to 4.9 percent in November, a record high since the single currency was created more than two decades ago..."
The key takeaway from this: policymakers and economists are now warning: "price pressures are likely to persist for longer than expected."
The key element of this conclusion appears to be that the major problems are supply-side related, and demand side stimulus has just exacerbated these problems.
The problem on the supply side?
Many, many markets are in some form of disequilibrium whether it is energy related, supply-side related, pandemic related or other markets experiencing some form of dislocation.
But, on the demand side, one can only say that there are massive amounts of money available in the world, primarily injected into the financial system to protect against a more severe economic downturn to support whatever market adjustments that are needed.
Worldwide Impact
And the situation is one impacting the whole world, not just the European Union, not just the United States.
The Organization for Economic Cooperation and Development has just released its latest forecast for the global economy.
"The pickup in inflation rates around the world will be longer-lasting and sharper than previously anticipated, with a growing risk that households and businesses will grow accustomed to faster price rises..."
When the explanations for the rise in inflation are given, the examples, like the ones above, all come from the supply side of the equation.
Yes, there is plenty of money floating around out there in the system, but the dislocations are all seemingly from the supply side.
Consumer price inflation in the United States is expected to average 4.4 percent in 2022 up from the last forecast of 3.1 percent.
Inflation in the eurozone will be at 2.7 percent, up from the last forecast of 1.9 percent.
Prices are certainly expected to rise.
The problem is that so many of the solutions that are proposed for the supply side disequilibrium are demand side in nature.
Such policies, if they are finally passed by the U.S. Congress, will only add to the pressure on prices, which, in many cases, will only add on to the existing inflationary pressures.
And, this is true worldwide, and not just in the United States.
Recognition Of Reality
Jerome Powell, Chairman of the Board of Governors of the Federal Reserve System, seems finally willing to concede that the current inflation may not be temporary.
Mr. Powell, during a Senate hearing, confessed to feeling that maybe the Fed's tapering of security purchases may have to be accelerated.
Mr. Powell has been a strong advocate of the position that the current bursts of inflation were only "temporary."
Now, these might be slowed down, but not immediately stopped.
This seems to me to be a little off-the-mark.
The original plans for tapering still produced a figure of $420 billion in securities that the Fed would buy, outright, by June 2022.
It seems to me that if Mr. Powell is going to speed up the tapering, so that it ends, say by March, the Fed will still have acquired over $200 billion more in securities.
If the problem on the demand side is that the financial system is swimming in liquidity, adding another $200 billion to the banking industry is not going to fight the inflationary pressures.
Unless, as the Fed has been doing for much of this year, the Fed continues to remove funds from the banking system by the use of reverse repurchase agreements.
The Fed has still not owned up to the fact that in 2021, it has sold securities, under an agreement to repurchase them, at a greater pace than it purchased securities, outright.
So, Mr. Powell finally seems to be admitting that maybe the inflation we have seen is not temporary, but he has still not given us a clear view of how the Fed will move forward in the future.
Anyhow, The Problems Are On The Supply Side Of The Economy
In a real sense, however, the Federal Reserve can do very little to solve the supply side problem.
That is, the Fed can be a major factor in higher inflation rates, but can do little or nothing to stimulate economic growth.
The federal government can do things to help soften the impacts of the supply side problems, but these are often clumsy and take a lot of time to execute. However, it does not seem that the current efforts from the fiscal side are really directed to accomplish supply side dislocations.
In essence, the problems now being faced by the United States, and the rest of the world, are the consequence of the fiscal and monetary policies of the government over a pretty long period of time. Some analysts place the beginning of the situations of disequilibrium we are now facing back in the 1980s.
Myself, I think the dislocations began in the 1960s.
Regardless, the situation we are now in began a relatively long time ago. Expectations have been built up over this period of time and are now a fundamental element in the environment the policy makers now face.
The biggest legacy now impacting the world is all the money that central banks have injected into the global economy over time.
And, still the European Central Bank continues to continue its monetary stimulus.
Martin Arnold discusses the role the ECB is now playing in the inflationary environment. He quotes Charles Hepworth, investment director at GAM investments:
"It may be wishful thinking on the part of ECB president (Christine) Lagarde when she declares that price pressures won't run out of control--they already are and it's difficult to follow the argument that it will abate soon"
So, the accommodative policies continue on.
The Future
It seems to me that our situation boils down to three factors.
First, the economy is experiencing substantial number of disequilibrium situations, some quite large.
Second, there is an excessive amount of money floating around the economy that can support whatever means the disequilibrium positions need to adjust.
Three, politicians still focus upon the current employment situation as the crucial issue to get themselves re-elected.
This, to me, is a picture for further inflation.
The economic recovery following the Great Recession was an anomaly. The low level of inflation experienced during that period was unusual. We are now in a situation when we can expect greater amounts of inflation.
This article was written by
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Comments (15)
Maybe a wee bit hyperbolic..but.
