Not all inflationary price increases are created equal.
Though inflation is universally understood, its underlying causes and historical manifestations continually mutate.
For the Ancient Romans, a massive military apparatus weighed down on the coffers of the Empire, leading to a brutal debasement of their golden aurei, and both silver coins, the larger silver denarii and smaller sestertii, as well as the bronze ass. Here’s the declining silver content of the denarius in chart form:
The silver denarius, which was composed of 95 per cent silver in AD 60, saw its content drop to 85 per cent by AD 110, 75 per cent by AD 170 and 60 per cent by AD 211.
Ever larger payments to a growing number of legions during the turbulent third-century crisis eventually led to the denarius consisting of only 5 per cent silver by AD 270.
In Roman times, just as now, one’s eye (or a hardened tooth) could easily spot price changes using their own basket of favoured goods.
My own Roman inflationary equivalent was found in the price of coffee as a university student at UCL in 2015.
Bearing the wafty odour of hashish and terrible Hare Krishna curry, you could pinch a cheap brew at the SOAS student café for £1.50.
These days you’d be lucky to find any delicious caffeine-based product for under £3. Flat whites, unfortunately, have long disappeared into the > £3.50 region in most central London locations.
But what we want to know is who foresaw the great inflation of 2022 when it mattered?
Those Who Got it Right
They say a stopped clock is right twice a day.
Peter Schiff, for instance, has hardly ever changed the nature of his calls whatever the economy is doing. The buying case for gold on the back of imminent currency collapse and inflation is always “now” in his worldview.
But clocks are only reliable when they are right all the time.
In that spirit here’s a roll call of the weightiest voices who sounded the alarm on inflation early on, but who — unlike serial inflationistas — also understood the merits of QE in the immediate aftermath of the global financial crisis when deflation risk was greatest. Their warnings may have fallen on deaf ears at the BoE’s Monetary Policy Committee and the Fed’s Federal Open Market Committee. They may even have been muffled by shoutier voices on social media pushing the “transitory inflation” line. But the historic record stands with them.
Given their number and quality — we find it curious the media consensus erred towards the transitory position at all.
- Andy Haldane, former chief economist at the Bank of England
When Haldane left the Bank in June 2021 for the Royal Society for Arts he blamed central bank rate-setters for underestimating the risk of a rapid rise in inflation in the United Kingdom. Haldane condemned the ‘dependency culture’ that companies had developed around ‘cheap money’, leading to individuals failing to face risk lest they lose out.
He also pointed out that the key factor to recent inflationary pressures was the combination of Covid-19 restrictions measures being lifted from 2021 onward, a stimulating fiscal and monetary response by the government, and the release of consumers’ lockdown-accumulated savings onto the market.
- Larry Summers, former United States Secretary of the Treasury
Larry Summers has been warning about the inflationary effects of Biden’s policies since February 2021.
Back then, Summers implored individuals to consider that Biden’s $1.9tn Covid-19 relief plan was three times as large as the projected output shortfall of the US economy, whereas Obama’s stimulus package was about half as large as the output shortfall.
Whereas Summers praised the logic behind the plan, he warned policymakers it would set off significant inflationary pressures “of a kind we have not seen in a generation” – and that we may be “heading for the worst inflation risk in 40 years.”
By July 2021, an article in Politico claimed the White House feared Summers’ increasingly pointed warnings were correct.
- Martin Wolf, chief economics commentator at the Financial Times
In June 2021 — the peak transitory inflation debate era — Martin Wolf noted the Fed’s policies could let the “inflation genie out of the bottle”.
In his mind, the Fed’s outcome-based (rather than forecast-based) rate-setting policy meant it was responding too slowly, thereby guaranteeing an overshooting of its ultra-loose monetary policy.
Wolf worried the monetary policy response may be even harsher than in the 1970s. In 1979, Wolf recalls that Paul Volcker’s tightening actions to curb inflation were brutal for the world economy. He worried that significantly higher debt levels today could lead to even harsher monetary response side effects.
- Chris Giles, economics editor for the Financial Times
Chris Giles sounded the warning bell on inflation in June 2021, by giving a nod to those claiming that turning points in price trends happen just when the experts dismiss the risks.
Giles did not believe an inflationary turn would lead to Weimar-style hyperinflation, the 80s Latin American debt crisis, or even the wage and price spirals of the 1970s.
Worried that misplaced expectations of technological progress and globalisation created a hubristic feeling that demand could never outstrip supply, Giles noted a falling adult population and shrinking workforces, alongside Covid-19 supply-side issues, are events that will sharply increase inflationary pressures.
- Pippa Malmgren, American economist and former white house advisor.
The down-to-earth approach of Pippa’s analysis has always relied on the active observation of pricing trends in the day-to-day – or ‘signals’ as she calls them – as a complementary mechanism to the mammoth data sets favoured by central bankers.
The technique saw her warning about commodity-driven price increases all the way back in 2011. Some might say this was too early to be of any use. But the diagnostic framework she set out was still correct. That gets her a placing on the shortlist.
For example, Pippa discerned the hidden hand of QE in the tumult of the Arab Spring via the significant increases in the price of bread and basic commodities in the Middle East. She believed QE would eventually see investors shun paper assets in favour of hard assets in the Western world too, spreading geopolitical instability beyond the Arab world.
Pippa’s other big call was calling out “biflation”, a simultaneous state where both deflationary and inflationary forces are influencing different aspects of the economy. Observed price rises in products like rent and food sometimes concealed what she termed ‘shrinkflation’ – the art of reducing the volume of a product being sold while retaining the same price, like the Cadbury eggs or Toblerone bars volume reductions.
- Teun Draaisma and Ben Funnel of Man Group
Ben Funnell (left) and Teun Draaisma (right) of Man Group spotted the paradigm shift early on. Back in March 2020, just as the Covid drama was unleashing itself, Draaisma noted the scale of fiscal responses to Covid-19 risked shifting the paradigm on inflation.
Both Draaisma and Funnell wrote a guest entry in the Financial Times in July 2020 where they announced that “for the first time in 40 years, we believe we may now have to face up to the corrosive power of inflation”.
They noted the disinflationary regime of 2020 started in 1982, and had been sustained by loose monetary policies in the wake of the global financial crisis of 2008. Draaisma and Funnell argued the coming shift to inflation would be brought on by excessive fiscal and monetary responses to the virus, as well as a general shift towards stronger fiscal policies.
- Peter Hitchens, author, broadcaster, journalist and commentator
Peter Hitchens wrote a piece for the Mail on Sunday in May 2021 warning that 1970s-style inflation would be returning to the United Kingdom.
Hitchens complained that the state-run inflation index, was rising far more slowly than essential goods like train and bus fares, electricity and gas prices, among others.
He added the spending of “impossible sums of money” disbursed by the UK Government “in a frenzy of panic” did not match the size of the economy, leading us toward a future of brutal currency devaluation.
- Liam Halligan, economist, journalist, author and broadcaster
In September 2021, Liam Halligan warned a “winter of discontent” may once again come to define the current era of economic and political reckoning as it did in the 1970s.
Halligan drew several parallels between the present and the 70s. He recalled consumers complaining of shortages, increasingly strident trade unions demanding higher wages, price inflation, and geopolitical tumbles.
Halligan expects the situation to result in a similarly lethargic and noxious “stagflation”, forecasting a potential rise in unemployment and wider economic instability.
- Moneyweek editor John Stepek
John Stepek’s June 2020 front-page splash outlined his belief that while central bank printing did not lead to inflation in 2008, this time would be different.
This was down to healthier bank balance sheets pushing QE money beyond the financial system and into the real economy, impacting consumer good prices, and not just asset prices – thus creating real inflation.
- Notable other mentions
Russell Napier, Niall Ferguson, Tim Congdon.
Those Who Got it Wrong
- Paul Krugman, economist and public intellectual
Paul Krugman’s recent mea culpa in the New York Times on being wrong about inflation says it all. The famous American economist admitted his position on the $1.9tn recovery plan had been far too relaxed with regards to its potential impact on inflation.
Krugman believes the inflation surge he failed to foresee mostly reflected pandemic-associated disruptions, shifting spending away from services and towards goods. Early retirement, reduced immigration, lower child care, and a growing number of unfilled job openings led Krugman to state the US economy’s productive capacity had been reduced further than he’d expected.
Nevertheless, Krugman continues to state the economy is “cooling off”, and that inflation has either peaked already or will be peaking soon.
- David Rosenberg, founder and president of Rosenberg Research & Associates
Back in March 2021 David Rosenberg was adamant that comparisons of the post-Covid economy to the roaring 1920s in the United States were a “fairy tale”.
Instead, a lower share of essential economic activity in the United States, de-urbanisation and static home ownership trends, and a debt-to-GDP ratio that incentivised tax increases, as compared to the roaring 20s, would not lead to an overheated economy.
- Janet Yellen, secretary of the United States treasury and former Federal Reserve chairman
Janet Yellen admitted in June 2022 that she had failed to anticipate the impact of the recent inflationary surge on the American economy and supply-side shocks such as the Russo-Ukraine war, continued Covid-19 variants, and Chinese lockdowns, which have made energy and food prices shoot upwards, and bottlenecked supply chains.
Having once framed inflation as a temporary side effect of a return to normality, Yellen claims these unforeseen events have proved her wrong; changing the current economic context and leading to a clear hike in inflation.
- Andrew Bailey, the current governor of the Bank of England
Andrew Bailey has tried to distance himself from claims by Conservative MPs that the Bank of Engalnd acted far too slowly on inflation than it should have, mostly by blaming Russia.
But the record stands. In early 2021, Bailey was sticking stubbornly to the transitory narrative, only beginning to change his tune in October 2021.
This August, Bailey admitted the UK faced a “very big” shock to inflation, and that risks of inflation becoming persistent had increased since the previous meeting in June, prompting a need for “stronger action”.
- Cathie Wood, ARK Invest CEO
Wood recently admitted she was wrong about inflation and that it had turned out to be a “bigger problem” than she appreciated it would be this time last year.
She has blamed a duo of unforeseen events for her shortsightedness: the continued Covid-19 related supply chain disruptions and the Russo-Ukrainian war.
Today, Wood cites larger-than-expected profit shortfalls at large consumer outlets due to excessive inventories claims as evidence that the economy is already in a recession.
What Does The Future Hold?
Those who have (currently) got it right on inflation are far from united on what lies ahead for the economy. Peter Hitchens and Liam Halligan clearly see a return to the stagflationary period of the 1970s, with the attendant labour and energy crises.
Martin Wolf is worried the impact may be worse than in the 70s, considering the much higher amount of debt in the economy – whereas Chris Giles does not believe we will enter a 1970s environment at all. Both he and Pippa Malmgren are optimistic that Western markets will avoid a Weimar-like hyperinflationary environment.
Central banks do have some commonalities in their estimations.
Having called the definite return of inflation in April 2022, the BIS has called for decisive action to curb inflation. The BIS similarly does not see a return of the 1970s stagflation, but says this is due to “improved monetary policy and macroprudential frameworks and less reliance on energy”. However, they warn that high debt and overvaluation of asset prices could magnify any slowdown.
The Bank of England believes that though the rate of inflation is set to keep rising through 2022, they forecast it to slow down by 2023 and to arrive at 2 per cent within the next two years. This analysis is grounded in their estimation that, alongside the rapid rise in interest rates, the causes of high inflation are temporary. However, they do expect that “the prices of some things may stay at a higher level compared with the past”.
The European Central Bank concurs with the BoE, stating inflation should average 6.8 per cent in 2022 before slowing down to 3.5 per cent in 2023, then converging to the 2 per cent target by 2024. They expect that once the demand-and-supply-side shock of the Ukraine war begins to dissipate, growth will strengthen.
The Federal Reserve still aims to raise rates into this year and next, despite the softening rise in CPI announced in August. In June, the Fed lowered its 2022 US growth forecasts from the 2.8 per cent forecast in March to 1.7 per cent – whether these lower growth forecasts are to shift the Fed’s aggressive rate-tightening policies is yet to be seen.
Lastly, the IMF expects these Fed et al rate rises to slow consumer spending growth, higher mortgage prices to reduce housing prices, slowing demand to increase unemployment, all of which they predict will lead to a slowdown of inflation to around 2 per cent by late 2023 – and economic activity to slouch down to 0.6 per cent by the end of 2023.
Though the above institution’s consensus opinion is well-founded in economic analysis, it may hold some political blind spots.
The relative doves in our list tend continually forecast supply-side disruptions as temporary — but this does not account for the difficulty of replacing Russian crude or Chinese manufacturing in the short-term.
On a long enough time scale all inflations end up being transitory. The Blind Spot’s editor, Izabella Kaminska, has warned that the de-neutralisation of the dollar in the wake of sanctions — and what that may mean for the globalised dollar-based payments system — could have longterm unforeseen effects.
Inflation, in that case, may be subdued, but the question will be at what cost? If the great financialisation flips into de-financialisation and a rampant politicisation of financial markets — or a world war — we risk seeing an unprecedented de-scaling of the global economy. Unless this trend is accompanied by major productivity-inducing innovation, chances are inflation won’t be defeated easily at all — not without some sort of permanent wealth destruction or a top-down government-imposed rationing system.
Nouriel Roubini, a.k.a, is one economist who agrees. “Even if you have 3.8 per cent, we have inflation still well above target around 8 per cent, falling only gradually,” he told Bloomberg this week. “Markets expecting a pivot and the Fed cutting rates next year to me sounds delusional.”
Goldman Sachs Chief Economist Jan Hatzius is also expecting a hard landing no matter what.
Even if the inflation doves are correct, and a hard landing generates a deflationary effect, it seems rational to conclude policymakers will respond by throwing the same old tools (lower rates and QE) at the problem. In a multi-polar monetary world that might not work out so well for trade-deficit-bearing economies.