Peter Warburton – July 15, 2021

Suppose, in a moment of alcohol-induced weakness, you ordered several pizzas online. Half an hour later, there is a motorcyclist at the door holding a stack of pizza boxes. You open the door and explain that there has been a terrible mistake, that you pressed the wrong button and would he please take them away (with the possible exception of the extra hot pepperoni). The pizza man sighs, shows you the details of your order and demands immediate payment in full. This is, in a nutshell, what the US and UK governments have done. They mandated this inflationary departure. They ordered it. And now the deliveryman is here, standing on the doorstep, demanding payment. The Fed and the Bank of England are implicated in the inflationary embarrassment through their acquiescence but are otherwise irrelevant. We have an escalating inflation rate because the state has nationalised the credit creation process and co-opted the central banks in support of their endeavours.   

The latest batch of US and UK inflation data has prompted a frenzy of analytical wizardry, slicing and dicing the data (figure 1) to support the typically wide spectrum of opinions on the likely permanence of the inflationary departure.  When a fire consists of a few wisps of smoke and an occasional yellow flame, there is room for reasonable disagreement over its future. When the kindling is ablaze and the logs beneath are starting to change colour, then the probability of the fire going out has plunged. It has fuel, it has oxygen and it has heat. This is where we are with Anglo-Saxon inflation. We have fire, and we should expect the fire to spread. The fact that we can still identify some pieces of wood that remain uncharred, is of no consolation. The fire is coming for them too.   

In previous blogs, we have articulated the various ingredients of this inflationary process: the unpreparedness of the healthcare and social care systems for a pandemic, that prompted an orgy of indiscriminate public spending; the extraordinary willingness of central banks to expand their balance sheets, largely through the purchase of government debt; the fracturing of domestic and international supply chains; the depletion of goods inventories during the pandemic; the complex behavioural changes that have altered the shape of consumer and business preferences and induced significant structural changes in the availability of labour and the demand for spacious housing (figure 2). In economic terms, the pandemic has galvanised some activities (and individuals) but paralysed others.

Last year, we used the analogy of holding one’s breath underwater to describe the likely impact of shutting down swathes of economic activity for an extended period. We have reached the point where those that are alive can come up for air.  There may be fewer bodies than expected floating on the surface, but the survivors have a great deal more lead in their pockets than before. Their survival is not assured by reopening: the next few months will be critical.

The next test for government will be its willingness to provide ongoing financial support to ailing households and businesses, and to fund the massive transitional costs of eliminating public services backlogs. This will determine the degree of monetary accommodation of the inflationary process. Central banks, who appear now to have only an unemployment objective, will keep the spigots open, by popular request.

Figure 1
Figure 2