Inflation: Why It’s Going to Be a BIG Problem

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Inflation: Why It’s Going to Be a BIG Problem

Taken from On Target 268

The consensus view of the US central bank and of economists is that the coming surge in prices will be temporary and therefore not to worry about too much. Several factors support the opposing view on inflation…

► Although the lavish handouts aimed at countering damage done by the pandemic will be withdrawn as the economy bounces back, they will have ongoing, permanent consequences. The Biden administration is using the much greater tolerance for public spending and boosted sense of entitlement to push through big welfare plans.

► Much of the massive stimulus wasn’t needed by consumers and has been saved. But it’s starting to create demand for everything from home goods to vacations, cars and real estate. We’re seeing that in the latest figures of consumer inflation, which hit 5 per cent in May in the US. Spending of the excess stimulus accumulation could easily last a couple of years, perhaps more.

► There’s a real prospect of inflation in consumer prices driven by the costs of commodities, where the catch-up after a decade of low prices is likely to be accompanied by explosive growth in demand for minerals needed for the electrification such as copper.

► Deglobalization: The shocks of the pandemic and rising geopolitical fears awakened countries to the dangers of depending on international supply chains. The outcome is increased spending on making things more “at home” instead of factories the other side of the world, raising costs of production.

► Other changes make that worse. There are labour shortages in China and the US. There aren’t enough microchips – “the new oil” — to meet spreading as well as growing demand. New IMO2020 emissions rules are a significant ongoing source of higher costs in shipping.


► The plan to remake the world’s entire infrastructure in service to the carbonatics’ lobby is going to be inordinately expensive. To come even close to achieving the stated goals of carbon neutrality is going to require massive investment. Costs will be passed on to consumers.

► “The biggest sign of inflation is precautionary buying” says Eoin Treacy in FullerTreacyMoney. “Housing and cars are part of that, but it is when companies abandon just-in-time inventory management that we will have clear evidence of inflationary policy feeding through to real-world effects.

“The only clear conclusion is… we are at the dawn of a new inflationary cycle. Pieces are falling into place for a replay of the early 1970s.”

The Fed’s move away from pre-emptive action in its new policy framework is the most important factor raising the risk that it will fall well behind the curve and be too late to deal effectively with an inflation problem without a major disruption to economic activity, says Deutsche Bank. Gains for the Democrats in next year’s mid-term elections could pave the way for the Fed to opt for higher inflation as a policy objective.


Inflation: Why It’s Going to Be a BIG Problem taken from our ‘On Target Newsletter’ issue no 268

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