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The world has entered a “new inflationary era” in which consumers’ and businesses’ expectations about prices are becoming “unmoored” from their historical norms, the president of the Bank for International Settlements (BIS) has warned.
Russia’s invasion of Ukraine triggered sanctions that supercharged inflation in food, fuel, and across consumer and industrial goods well beyond the record pace set by surging post-COVD consumer demand, which we reported in “Ukraine War and Sanctions Will Decimate Emerging Economies” (5 Apr 2022) (see related story in this issue).
Low interest rates, COVID-era government subsidies, central governments’ massive purchase of sovereign and corporate bonds, and other “policy settings, at least in the past year, may have served as a springboard for the rapid expansion” in prices, BIS chief Augusten Carstens said in a 5 April speech in Geneva.
“A generation of workers and business managers who have never seen meaningful inflation…in advanced countries are learning that rapid price rises are not merely the stuff of history books,” he said.
Consumer prices in the world’s 30 wealthiest countries jumped 7.7 percent in February, year over year, more than four times the 1.7 percent rise the previous February and the most since December 1990, according to the data from the Organization for Economic Cooperation and Development.
About 60 percent of advanced economies have seen inflation above 5 percent, while more than half of low-and modest-income nations have confronted inflation running above 7 percent, Carstens said.
As inflation persists, businesses are increasingly likely to pass cost increases to customers and workers then are more likely to demand higher wages, setting off a wage-price spiral that central banks will find hard to reverse, he added.
We first warned that a wage-price spiral was a growing prospect in “Fed’s Key Inflation Gauge Hits 30-Year High” (5 Oct 2021).
“Structural factors that kept inflation low in recent decades may wane as globalization retreats,” Carstens added. The COVID virus “as well as changes in the geopolitical landscape, have already started to make firms rethink the risks involved in sprawling global value chains.”
Central banks must adjust policies, he said, because “no one wants to repeat the 1970s,” when the Vietnam War triggered inflation that lasted for years and scored double-digit price hikes three years in a row.
Although many central banks have already raised their interest rates to varying degrees, “it will be a challenge to engineer a transition to more normal levels and, in the process, set realistic expectations of what monetary policy can deliver,” Carsten cautioned, “nor will the change in central bank behavior be popular.”
TREND FORECAST: “ ‘Inflation shock’ worsening, ‘rates shock’ just beginning, ‘recession shock’ coming,” Michael Hartnett, Bank of America’s chief investment strategist, wrote last week in a note to clients.
Unfortunately, as we have documented extensively and repeatedly, the U.S. Federal Reserve has not shown an ability to deal with any of these threats successfully, raising the risk of Dragflation, our Top 2022 Trend in which prices rise while the GDP shrinks.
As we have noted again and again, the U.S. Federal Reserve was focused on triaging the jobs market and failed to raise interest rates to curb inflation, letting it run wild, as we have reported in articles including “Powell Warns of Dangers for Labor Market” (16 Feb 2021), “Fed Will Hold Policy Steady, Powell Says” (9 Mar 2021) and “Fed Holds Firm on Policy Despite 5-Percent Inflation” (20 Jul 2021).
When the Fed had a chance to raise interest rates in a meaningful way at its meeting last month, instead it became timid after Russia invaded Ukraine, opting for a quarter-point hike, which has had no impact on inflation.
And as we had forecast, should the Fed decide to boost interest rates higher and faster in playing catch-up with inflation, it risks greater damage to the economy than if it had acted more boldly when we saw what the Fed could not see and/or denied so they could keep pumping in cheap money to artificially boost equities… the real threat of inflation.
PUBLISHER’S NOTE: As inflation spikes, I was just thinking about this. When I was a 10 year old kid 65 years ago, a slice of pizza was 15 cents in New York, the average cost of a slice of pizza today is $3.26.
In 1984, when I bought 38 acres of land and an old house that needed complete repair with a Rhinebeck, NY address, it cost me $28,000. Today, for seven acres of land, it goes for $324,000.
The bottom line, wages are way behind inflation, the middle class keeps shrinking… and the worst is yet to come.