The current levels of inflation around the world are extremely high.

Why are the rates so high all over the developed world?

Because of all the free money Governments pumped into economies because of Covid?

Yes to a small extent but much less than people would logically assume.

The US did a huge amount of Pandemic stimulus, but its inflation rate is not really higher than other developed countries who did far less.

So, if not that then WHAT?

The first cause was a global DEMAND shock for goods. Covid hits, production of goods shuts down and people go on the internet and buy things. Those things are scarce, the movement of the goods is a nightmare, there are shortages all over the place and prices go up for a time.

This is transitory. Exactly the same happened after WW2

Goods demand has collapsed this year with retailers hugely over stocked. The cost of a container from China to US pre-pandemic was $3000, went up to $20000, now back at $3000 so transport has normalised.

20% inflation 1946/7

Deflation 1947/8

Secondly, this year has been a global DEMAND shock for services. People wanted to travel and have experiences again, prices of hotels, flights etc boomed for a time. Again, transitory and coming down now.

Thirdly, property boom. The reasons why are interesting, but the key now is that mortgage rates have trebled in the last 3 months. To borrow £350000 interest only, cost around £400 pm in May 2022. Now it costs £1200 plus. House prices are coming down (housing will be covered as a separate topic) but for inflation calculations, shelter is a big component and will be deflationary going forward.

In summation pretty much everything that was contributing to the initial spiking of inflation (Covid related) is in retreat. It’s likely year on year that many will actually be registering falls (deflation) over the next 12-18 months as the comparisons are high in relation to the last year.

So, what’s still scary and why are central banks smashing rates higher at the fastest rate ever seen?

Well, the biggest reason is energy. Russia has cut off gas supplies and Europe is deeply in the mire. Energy will be covered as a separate topic but all you need to know is the prices are up 500% -600% from a year ago. Huge inflation implications.

The second problem is that the inflation data is historic. Things have changed so rapidly that the data is still flashing high whilst the real time numbers have collapsed lower.

But crucially the inflation spiral all central banks want to avoid is inflation causing large wage increases causing more inflation.

Their solution is to break economies by causing a recession. This is what the US Central Bank is currently quite intentionally trying to do. People lose jobs, everyone is poorer, stop spending, demand falls, inflation subsides.

One final point before I sign off.

The oft made comparison of this current situation to the 1970’s is less accurate than you’d think.

Yes, the energy shock component is similar, but we don’t have all powerful labour unions and the demographics are completely different and were a huge factor.

In the mid 70‘s the boomer generation had entered the workforce and were buying everything they needed to create homes, so a huge economic demand shock.

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