Are supply chain issues this quarter’s transitory inflation?

When inflation began to rise, the Bank of England, its Governor in particular, was fairly sanguine about the risk, calling it transitory. That may indeed be the case, and it became a convenient reason for a Bank that was unsure what it needed to do as the pandemic raged.

Now, the recovery looks like it may be hitting the buffers, and officials, looking for a new excuse to cover the possibility that they may have got it wrong, see supply chain bottlenecks as a convenient scapegoat.

Now, every issue that is becoming known is met with the supply chain excuse.

It may indeed be the fact that demand is fast outstripping supply, but it is also true that anyone with an ounce of planning knowledge could have foreseen issues for the economy from the departure of thousands of EU citizens who left the country as Brexit became certain and freedom of movement to the UK was about to disappear.

Chancellor of the Exchequer Rishi Sunak tried to put a brave face on the considerable slowdown in growth in the economy yesterday by commenting that the fact the economy is growing at all is a tribute to the fact that the country is moving in the right direction.

The data coupled with a gloomy forecast for future activity from the NIESR has cast a pall of doubt around both fiscal and monetary policy.

Sunak went on to use the supply chain excuse by saying that the country i snot alone in experiencing such problems. That may be so, but the fact that the UK should have known in advance that there would be labour shortages remains.

The pound fell against both the dollar and euro in the aftermath of the release of GDP data. In Q3, the economy grew by just 1.3% following a final figure of 6.6% in Q2.

Year-on-year the economy expanded by 6.6% following the phenomenal 23.6%rise in Q1 which was driven by the emergence of the country from lockdowns.

The pound fell to a year’s low of 1.3358 and closed at 1.3365 versus the dollar. Against the single currency, it fell to a low of 1.1663 and closed at 1.1673.

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Republicans blame boneheaded support for inflation

Republican members of both Houses of the U.S. Congress are raging at the President over the boneheaded level of support that is still being pumped into the economy. They believe that the taper of support should have begun in the summer and be ending before the year-end.

That is clearly not going to be the case and the GOP member’s insistence that this is the cause of raging inflation could be true, but in such an environment as has been seen this year it is impossible to prove either way.

Data for inflation in the U.S which was released this week is continued to be considered transitory by the Federal Reserve. It is possible that they are keeping the supply chain excuse for use at a future date, although there have been some who have alluded to the issue, but it is being described as fading.

One Republican Senator decried the policy options currently being used as leading the country towards a winter of high energy prices, shortages, and inflation. He blamed this on the fact that far-left lunatics are in control of the Government.

Inflation is at its highest level since 1990 and there is a growing fear that it is being caused by a structural weakness in the economy.

The fact that the economy is becoming ever more concentrated within the hands of a few massive, and growing, companies allows them to raise prices at will with little or no corporate oversight.

When viewed through the lens of rising corporate profits, the fact that several large conglomerates continue to raise prices citing the cost of labour, the shortage of raw materials and logistical challenges despite their profits continuing to rise at close to record pace shows where the fracture is.

Numerous consumer staples are in the hands of few businesses, and they are voraciously gobbling up the competition. It may very well be that there is, for example, fierce competition between Pepsi and Coke for global sales, but within the U.S., this duopoly has cornered the market across a wide range of products.

High inflation is doubtless going to be around for some time but is likely to be labelled as transitory until the labour market realizes it isn’t, and begins demanding still higher wages, which will see the start of an inflationary spiral.

The dollar index reached fresh highs for the year yesterday. It reached 95.19 and closed at 95.14.

Cost of Government debt doesn’t reflect risk

Given the way the economies of many developed nations are dealing with rising inflation, the method being adopted by the ECB may turn out to be the most successful.

Bearing in mind that the majority of the Eurozone is not really facing an issue with inflation, the ECB policy of simply ignoring rising prices is the way to go.

Christine Lagarde and her colleagues agreed a new inflation policy in the summer which loosened the strictures of previous policies and allowed the Central bank to concentrate on growth.

It is only in the wealthy countries where inflation is rising at its fastest rate in decades that the denuding of wealth by inflation is a concern.

In countries like Spain, Italy, and Greece, they have seen it all before, and rising inflation is, for them, like a return to the good old days. This, coupled with the, for them, new phase of low-interest rates, is an easily accepted phenomenon.

One of several issues still to be dealt with is the subject of national debt issuance. Since the end of the Financial Crisis, various nations have been constrained in their ability to borrow and this had led to them becoming gradually more fiscally responsible, even if they never forgot their old ways.

Issue debt, then issue more debt to pay the interest on the old debt as rates rose, then default, devalue and begin again was how it was pre-Eurozone.

Now these countries are issuing debt that is sold to the ECB and this has kept rates artificially low.

There has been very little consideration given so far to how the ECB will extricate itself for being the provider of such support. There has been mention of the ECB simply writing off the debt of such nations, but this would set a dangerous precedent. Another suggestion is for the bonds to be made perpetual, meaning that the ECB would have them as permanent assets on its balance sheet.

The ECB and its President will have to face this challenge at some point, but at least Lagarde is used to dealing with the problems of heavily indebted nations from her time at the IMF.

Yesterday, the euro fell on the back of the strength of the dollar. It reached a low of 1.1443 and closed at 1.1447.