Living with Inflation

Please don’t let the dry title intimidate you into not reading this summation of inflation.

So much has changed since March 2020.

What was already excessive monetary policy, went on steroids during the COVID-19 shutdowns, and the world still reels from the aftershocks of those decisions.

The news is full of “inflation” stories, but what is it really? How does it actually happen?

The standard definition of inflation is too much money chasing too few goods and services resulting in higher aggregate prices.

For keeners, Fredrik Hayek and Milton Friedman will take you on an economic word journey to put flesh on those bones but, for our purposes, that definition will do.

Economics 101 would add another layer to that definition: there is demand-pull inflation and cost-push inflation.

Demand-pull is an excess of aggregate demand caused by an increase of the total demand for goods and services such that the aggregate demand is above the potential production capacity.

Cost-push inflation is an increase in prices due to an increase in the costs of productive factors higher than the increase of their productivity or rises in the raw materials used in the production process, the costs of energy or transport.

At the end of the day, neither of our two broken-out definitions can exist without the excess money being present. Therefore, our conclusion is the cause of the present day inflation comes back to central bank monetary policy, not economic policy.

When central bankers anointed themselves as monetary sovereigns, they actually sealed our future economic course at the same time.

The constant choice to hit “control-P” for print on their computer terminals to create more money had no other destination but right here, right now. It just took some time to arrive.

So how does the world move forward?

That depends on our leaders priorities.

Their priorities will depend upon how events unfold in coming years. Let’s view one chart and think about its ramifications for a moment.

Food inflation is a social disruptor.

Hungry people will protest and cause uprisings.

The Arab Spring years ago was a recent example of where food inflation caused social instability.

If you add the costs of housing/rent and fuel to the equation, it doesn’t take long to see that even though wages are rising, they are not rising fast enough. More on this below.

What is really concerning here is that the chart above was published by the Washington Post using American data. Look at how the food inflation has trended in Emerging Markets (EM) relative to the US.

These are typically countries with lower standards of living for the majority of the people than the US. The chart above outlines conditions, which have historically caused people to riot.

If nothing socially destabilizing happens, my guess is the central banks continue to feed us their usual rhetoric of transitory inflation and not a lot changes.

If social unrest and civil disobedience grow, politicians will step in to force change. We will continue to monitor the news for stories pointing towards a clue as to which of the above is happening.

To be clear, I believe that up until the 2020 COVID crisis financial response, there was a potential pathway back to an economic world where the fiat currencies maintained a slow-to-moderate diminishing purchasing power and would be in existence for the rest of my lifetime at least.

With the inflation tsunami unleashed upon the world via the monetary printing presses since 2020, I see no pathway back to 2019 purchasing power for any fiat currency.

What does this mean for our real lives in Canada?

• Wages – wages are going to be a point of contention. Strikes will become more prevalent as jobs stay plentiful allowing workers to confidently quit since they can find a new job easily and costs of living keep rising. A high profile strike by John Deere in Iowa may become more the norm. Workers were offered a 23% year 1 increase (10% wage plus an $8500 signing bonus), 5% in years 3 and 5 and 3% cash bonuses in years 2 and 4…and the deal was rejected 55% to 45%. Does that remind any of you of the 1970s? I bet it does…
• Housing/rent – accommodation is going to continue to challenge in a two dimensional fashion. Listing prices for purchases will remain “sticky high” and the cost of upkeep, repairs, renovations, and taxes will keep continue to escalate.
• Food – Food prices are only just beginning their ascent. The dynamics are firmly in place for long term higher food costs due to the increased costs in growing/cultivation/processing/transportation and distribution. These costs will be passed on to consumers.
• Transportation – Demand will continue to be strong which will keep oil/gas prices high. Wage demands in this sector are set to take off. If you are a trucker or a longshoreman, you hold an incredible amount of power over your employer in terms of your wage demands. Regular households will continue to see the cost of running their vehicles grow.
• User fees/taxes – all levels of taxation are set to grow due to the transfer of debt from the banks/consumer to the governments in the last two financial crisis. (2008 and 2020). This represents another silent erosion of purchasing power for all.

This editorial started with the idea of too much money chasing too few goods as being the root cause of inflation. I hope that the brief outline above helps you see how the costs of pretty much everything around you have risen and why they are unlikely to stop unless interest rates go up a lot.

Even if we go back to before the 2008/2009 housing crisis recession, and consider what percentages of the world lived at an abject level of poverty relative to a typical North American/Euro lifestyle, that percentage has grown drastically in the past 14 years.

For every nation that sees its middle class lifestyle grow leaps and bounds we see another stress upon the global resources of food, water and energy.

It is good news to see so many lifted out of poverty in the world, but our limited resources are not adequate for EVERYBODY to live the middle class lifestyle.

Lots to think about this week, feel free to comment back.