The May Consumer Prices index for the US, has surged to 5%. It is the biggest increase since August 2008, excluding food and energy prices, it rose by 3.8%, the biggest increase since May 1992, when prices rose by 5.3%! The figures not only explode the 2% inflation target of the Federal Reserve, but also hugely exceeded the current predictions.
Yet, central bankers continue to push the line that this inflation that has been rising month after month, and looks set to continue to rise month after month, is only “transitory”, or is accounted for only by “base effects”, because it is being compared backwards to a year ago, when lockouts and lock downs seized up economic activity, and caused prices to drop, as demand was artificially curtailed. The problem with that argument is that, for the last year, they were happy to ignore that effect in reducing the headline price inflation, whilst ignoring the fact that large numbers of commodities that consumers switched their spending to, and whose prices rose sharply were not included in the official inflation estimates! The other problem is that, its not just against the year ago figures that inflation continues to rise, but month on month too, so that, for example, May's US inflation data showed a rise in prices compared to April's prices. Its true that month on month the rise in May as against April was not as big as April against March, but that is because April represented the first month when lockouts were being lifted to a large extent, and so all of the pent up demand was surging out into the market, washing all of the oceans of liquidity into every corner of the economy.
A look at the upward slope and extent of the curve of CPI, shows it far exceeds that of previous recent periods. To coin a phrase, ubiquitously, and mostly erroneously used during the pandemic, it begins to look as though it is rising “exponentially”. Such rises in prices tend to be self perpetuating, as consumers see prices rising week after week, and rationally assume that it will continue. They adjust their behaviour accordingly. In the 1970's inflation, I remember going to the Co-op each week, and loading up with large numbers of cans of baked beans, and other such items, buying vinegar, ketchup and brown sauce in 5 litre catering containers, in the certain knowledge that the price paid then would be much lower than the price a week or two later. The same behaviour is seen with people buying houses. The difference is that when house prices subsequently crash, you end up still with the mortgage debt.
But, the resultant increase in demand means that suppliers, also facing rising prices from their suppliers, act in a similar manner, and all of the resultant demand, fuelled by large amounts of liquidity provided by central banks pushes up prices, so that the expectation of rising prices becomes self-fulfilling. In the 1970's, the government having seen workers also do the obvious thing and demand wage increases they thought would cover them for coming price hikes, and so who demanded pay rises above current inflation, for example the 27% pay rise won by miners in 1972, followed by their 35% claim in 1973, decided to try to head it off, by introducing a sliding scale of wages linked to inflation.
Looking at the month on month data, for the US, the headline figure rose by 0.8% as against predictions of just 0.5%. The core inflation index rose by 0.7% again versus an estimate of 0.5%. So, the pace of inflation continues to defy the expectations that it is somehow transitory. In April the figures were 4.2% for the year on year headline inflation, 0.9% for core inflation, and 0.8% for headline inflation, month on month. In response to the central banks claims about base effects, therefore, if we take these month on month figures, and project them forward a year, then we would have averaging out the last two months figures arise of 1.6% x 6 = 9.6% (actually more than that when compounded), and the same for the headline figure. A look at the data in greater detail shows why this 10% inflation figure in a year's time, is not that difficult to imagine. Already, indices of inflation that are “COVID adjusted” taking into consideration the effects on the basket of goods actually consumed, all come in at around that figure, and one estimate for the BBC of food price inflation, for the UK, came in at around 23%, since the beginning of the year!
Drilling down into the US data we see that used car prices that surged in the previous month's data, also rose again sharply, by 7.3% on the month, and 29.7% over the last year. The reason for that is fairly obvious that, as consumers have come to replace vehicles, they find that producers have run down stocks during the period of the lockouts. They are unable to ramp up production quickly enough to meet demand, especially as surging global demand has caused a worldwide shortage of microchips, which looks set to last for another year, and which has already caused some car makers to have to stop production until they have the required supplies. So consumers switch to buying a limited supply of used vehicles, pushing their prices sharply higher.
Similarly, prices for car and truck rentals surged by 12.1% on the month. That compares to a rise of 16.2% the previous month, and over the year it is up 110%! In a country where air travel is common to cover the large distances, the opening up of the economy, has seen the prices of tickets rise by 7% month on month, and 24% as against a year ago. The rise in the price of oil has still not fed through into energy prices, which means that is a factor that will be pushing inflation higher in the months to come, but petrol prices are up 56.2% over a year ago, whilst energy in general is up by 28.5%.
I recently commented on the fact that the rise in timber prices alone had increased the cost of building the average US house by $24,000. The rise in the price of copper used for electrical wiring, and for plumbing will also have played into a rising cost of new houses, and so of the cost of shelter. Timber and copper prices, along with the prices of some other primary products, seem to have hit a short term limit, as the consumers of them, can no longer pass on the cost in their own final prices, and cannot absorb the cost without wiping out their profits. But, as global demand for consumer products continues to rise, and as the oceans of liquidity continue to wash out in waves, driving final product price higher, they will again find they have headroom to cover those higher costs, and the demand for the primary products will surge again, moving prices higher once more. As the effects of rising wages, as firms have to bid for available labour supplies, also raises costs, firms will raise their own final prices in each sector, and central banks will respond by increasing liquidity to facilitate it, so as to prevent profits being squeezed.
On that score, the weekly jobless claims data also came out at the same time as the inflation data, and again showed a continuing trend of falling jobless claims as the economy opens up. It was the sixth consecutive weekly drop in claims, which came in at 376,000 compared to 385,000 in the previous week. As I reported recently, there continue to be numerous accounts of firms with large numbers of job openings unable to recruit workers, as workers now feel themselves able to pick and choose over which jobs to take rather than being desperate to take the first one on offer, as they see the potential for getting better jobs, and a higher starting wage, in a week or so from now, in the same way that consumers see the inevitability of rising prices.
The curve is clearly steepening in its decline, though still some way from the pre lockout levels of around 200,000. Hourly earnings rose by 0.5% on the month, but real hourly earnings fell by 0.2%, as a result of the increase in prices, which exceeded it. That illustrates the point that workers will begin to demand wage increases ahead of current inflation levels to protect themselves in the year ahead against even bigger price increases.
Today, also, the ECB had its monthly meeting and decided to keep its policy rate at zero, whilst continuing to flood the Eurozone economy with liquidity. The EU has not yet had the strong recovery seen in the US, as a consequence of it bungling the purchase and roll out of vaccines, which has held back the lifting of the lockouts and lock downs that have artificially cratered the EU economy over the last year. But, its inevitable that the EU will have a similar trajectory as that seen in the US. That in itself will have its effect in increasing the demand for primary products, and pushing up global inflation. Rising demand from the EU, as it reopens will also provide further stimulus to the Chinese and US economies, as it sucks in imports, and trade increases, which is likely to be at a greater pace under Biden, than under the cretinous Trump, as Biden seeks to rebuild the bridges with Europe that Trump blew up.
Indeed, the slowdown in the global economy in 2019 was a consequence of Trump's global trade war, as well as the effects of Brexit. It fulfilled a useful function for the owners of fictitious capital, in that it slowed the growth of wages, and of interest rates, which in 2018, had caused a 20% drop in financial markets. The effects of the lockouts and lock downs in global economies, which curtailed GDP by around 20%, had an even more pronounced effect on constraining wages, and demand for capital, so reducing pressure on rising interest rates. The opportunity for central banks to use it as a pretext for yet more QE, was the basis of the surge in financial markets in 2020, that rose to new record highs, illustrating vividly that the performance of financial markets is in inverse correlation to the performance of the real economy.
As, economies open, and all of the liquidity pumped into economies over the last year, now begins to wash out into consumer spending, and inflation that is beginning to rise “exponentially”, central banks and governments are keen to downplay the inflationary consequences, because as economic activity surges, and the demand for capital rises, whilst profits have all but disappeared, and balance sheets have been reduced, the consequence must inevitably be rising interest rates. Add to that the astronomical level of debt of states, and their commitments to spend trillions of Dollars more in programmes of fiscal expansion, and the stage is set for interest rates to rise much faster than financial markets are going to be happy with. Add in rising inflation, and so the fact that anyone lending at fixed rates today, will see both their return, and their capital reduced massively in value, over the term of the loan, and the stage is set for bond markets to go into meltdown, which will take down the stock and property markets with it. The central banks are keen to avoid that, which will make 2008 look like a sideshow.
Yet, there is little they can do about it. The liquidity is already out there. They are not going to repeat the exercise of Paul Volcker in the 1980's and sharply tighten monetary policy, which, then and now, would create a credit crunch, and sharp recession. Governments are committed to massive fiscal expansions, and they are not going to withdraw them, if only for their own short-term electoral reasons. Either all that borrowing pushes up interest rates immediately, or else its funded by money printing by central banks, which then simply feeds even higher inflation, as that liquidity then washes out into the real economy via the spending of the state, and then leads to rising interest rates, because the higher prices of goods and services means that both firms and government have to borrow even larger nominal sums to buy the goods and services they require, either for productive or unproductive consumption.
So, all the central banks continue to lean on the narrative that inflation is transitory, and they put forward the argument that the current surge in economic activity is merely a rebound from the reduction in activity caused by the lockouts and lock downs. In fact, the US economy is already back to the level it was at, before the lockouts began, and before fears over the virus began to affect economic activity. There appears to be a concerted effort, therefore, to continue to hold back the opening up of economies, and surge in economic activity. That is seen in the UK and Europe in particular. It comes from a variety of sources of groups with different interests.
The strategy of lock down was always an idiotic one for dealing with the virus. It sought in theory to isolate 100% of the population, which was always impossible, rather than isolate the 20% of the population that was actually at any kind of serious risk from it. So, it inevitably was unachievable, failed, and despite, in Britain, a lock down that lasted, in one form or another, for more than 15 months, saw nearly 130,000 deaths of people with COVID, though the ONS data suggests only around 13,000 deaths from COVID. More than 90% of those deaths were of people in the 20%, who should have been isolated, and protected. Indeed, the majority of those were people aged over 80, and, in turn, a majority of those people aged over 90! Showing the lunacy and hypocrisy of the lock down strategy, the majority of those dying were people in NHS hospitals (around 9,000 of those dying being people the NHS itself had infected after they went into hospital, with 25% of those it treated being so infected) or else people in care homes, again many of whom were infected as a result of infected people being sent back to them from NHS hospitals!
Throughout this period, as attempts were made to justify the lock downs, the lie was presented that everyone was at more or less equal risk from the virus, despite the fact that the data showed the opposite was true. Only when vaccines became available, and so in deciding who to vaccinate first, the government had to admit that it was the elderly who were at risk, and the young at virtually no risk, was that lie acknowledged, though not openly, of course. But, then having been acknowledged, the argument was shifted. When actually challenged on the facts about vulnerability, one line of defence had started to be, “what about long Covid?” But, the nature and details of “Long Covid” are shrouded in mist. The term covers a whole spectrum of symptoms from mild to severe, and even a proven link of these conditions to COVID itself is far from clearly established. Estimates suggest that up to 1 million people might suffer from Long Covid, but as with the figures of people who died with Covid as against from COVID, its likely that this figure is somewhat inflated. There were similar accounts of children taken ill with conditions that were supposed to be related to COVID, but further investigation showed the number was statistically insignificant. What Long Covid provided was an argument for those that wanted to promote lockouts and lock downs to do so, despite the fact that the data showed the virus as only a serious risk to the elderly.
Similarly, we now see arguments put forward by Christine Lagarde in the ECB press conference, as she tried to dampen talk of rising economic activity, that the pace of reopening of the EU economy was not certain because of rising pockets of infection, of people with new variants of the virus. The same argument is being made in Britain. In Britain, news reports focus on infections having risen five fold from around 1,000 to 5,000 per day, but that 5,000 is tiny compared to the number of infections that were being seen in previous months, moreover, with 80% of the population now estimated to have COVID antibodies, even according to the government, the chance that any infection, even with new variants is going to lead to any sizeable number of serious illnesses or deaths is remote.
Given the extent of vaccination, and of antibodies from natural herd immunity, there seems no reason why economies should not be fully reopened, including the full opening up of foreign travel. Talk of infections and new variants, now seems to be fulfilling the role of “Long Covid” in past months to justify a continuation of measures to slow down reopening, or at least to dampen expectations of rapid economic growth that would lead to rising interest rates, and crashing financial markets. But, that appears like trying to plug the dyke with your fingers. At best it might dampen sentiment for another week or two, but, across the globe, economies are rebounding, workers are getting back to work, and demand is rising. The liquidity put into circulation is flooding out stimulating demand, but also causing prices to rise. Surging demand, and a surging demand for capital is going to push up interest rates sharply, leading to a sharp reduction in the capitalised value of financial and property assets. No amount of additional liquidity, and certainly no amount of front running of meme stocks is going to stop it.
No comments:
Post a Comment