I was today referred from the New York Times to an article in the New Yorker, published under their Financial Page and entitled ‘Inflation – why almost everybody got it wrong’
In a short piece the writer points out why attempting to deal with inflation by referencing, amongst others, these factors, was not useful: the Philips curve; expecting unemployment to rise dramatically before inflation came under control; ignoring the ending of the Covid-19 consumer restrictions and the global container shortage that more or less co-incided with that; and above all the oil and gas price shocks triggered by mad Vlad’s horrific adventures in Ukraine.
These were all blunders made by government economists and central bankers. They treated inflation as a purely demand led issue and sought to strangle demand with interest rates. In fact the issue was mainly a supply shock. That was obvious, in my opinion.
As the article puts it, central bankers got lucky that inflation came down while interest rates were still high and they may have by a whisker avoided generating a totally uneccesary recession. They didn’t bring inflation down, but they can say that they did – I exactly predicted that a while ago.
Wage growth followed inflation – it did not cause it – and wages are still now growing while inflation is falling. That trend will need to stall if inflation is to stay low, but it almost cerainly will. That is because demand is slowing and consumption is lethargic is some large market segments. The interest rate measures – a blunt implement – may start working (by throttling demand) when the inflation problem has already gone way. That is why the markets are talking about a ‘bumper’ cut from the US Fed.
Inflation in the last cycle was a supply led problem, given an extra push by consumers (especially in the USA) returning to doing what they do best after saving up money when they were locked into their homes, consuming prolifically!
Economics textbooks are no doubt being updated with an extra chapter and some new ‘magic maths’ of the type economists love to use.
As the writer at The New Yorker said – almost everyone got it wrong. Those of us who looked at the facts, applied some logic and came to rational conclusions did not! There is a lesson in that which you will find repeats constantly: the tendency of the people in power to follow ‘conventional wisdom’, even when an ordinary educated person would suggest that it is foolish in the light of the actual current facts. Possibly the new UK government is doing just that with its fiscal plans? It looks like it to me. Aaargh! Lady Thatcher would approve!
As investors, we can likely see what the implications of wrong headed policy will be and protect our portfolios. Avoiding fixed income coming up to October 2021 and the repurchasing that asset class after its inevitable rebasing are a great example.
I will await Ms Reeves Budget before pontification about how the UK economy might develop.
As a bonus aside, I saw a chart this week which showed that the last Conservative government increased taxation as a percentage of GDP by a rate not seen for decades. So any more taxes, allied with the very poor productivity gains (virtually nil), suggest record levels of taxation (in terms of GDP share) in recent times might be awaiting my readers. That is not necessarily bad for the UK equity market, because the UK government is actually more likely to spend the money in the UK than its own citizens!
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