Covid Induced Inflation

For the last week or so, I have been writing about the effects of prices and revenues of Covid19, and the measures arising from it, such as the additional money printing, which leads to inflation, and the additional borrowing that leads to rising interest rates.  On Monday, I wrote,

"In supermarkets there has been both constraints on supply, as producers, where they were still operating, faced rising costs, at the same time that the lockdown of social activity meant that people needed to hold large stocks of food and other supplies. Constrained supply with rising demand has led to higher prices for a range of products. It has also taken the form of the removal of cheaper products from shelves and their replacement by more expensive, and branded products, as well as the removal of 2 for 1, and other multipack and multibuy offers. The general level of inflation has fallen because these higher prices for food and other essential items has been more than offset by lower prices for petrol etc., as the amount of travel has been slashed. Logically, however, those lower prices are of no benefit, because they are a direct result of consumers not buying or drastically reducing their purchases of those items. The Futures Price for oil, actually turned negative, for a time, because there was so much excess supply that those that held it faced rising costs to simply store it. It was cheaper to pay people to buy it than to pay to store it. A lower price for petrol is of little benefit to me if I can't use my car, and so don't need to buy petrol. A high price for the additional food and supplies I need to buy is, however, a distinct disadvantage. As is often the case with price indices, therefore, its somewhat of a fraud."

That has now been confirmed in a paper by Xavier Jaravel and Martin O'Connell, published by the IFS.  It points to all of the points mentioned above, and concludes that, in fact, looking at those things that people have actually spent money on, and looking at the reductions in choice, removal of multibuy offers and so on, inflation last month rose by 2.4% points.  Put another way, that is equal to about the average amount of inflation for a whole year, but in just one month!  It is in contrast to the official figure, which suggested a fall in inflation.

In the paper the authors point also to the effects of rising costs, as I also detailed in previous posts.  As I also set out on Monday, those higher costs are not going away, because of the effects of measured put in place in relation to Covid and the lockdown.  And, as I also set out, higher prices tend to linger, whereas lower prices more quickly result in a reduction in supply to correct them.  Moreover, as demand comes back for a whole range of products and services, as lockdown is ended, this demand meeting inadequate supply is likely to see further spikes in market prices, as the sea of liquidity that has been unleashed pushes prices higher.  We have already seen long queues develop at stores as soon as consumers were enabled once more to shop.

Those higher prices reflecting higher monetary demand as all that liquidity flows into commodity circulation, will also lead to higher money profits.  Firms will not want to miss the opportunity to seize those higher money profits, and avoid losing market share, so they will also be keen to employ additional labour - even if just via overtime - and many will have to borrow to raise the working-capital required.  That means pressure on interest rates to rise is close at hand.