the elephant in the room

[seldomrite]

There is an elephant in the inflation room that people seem to avoid mentioning as if it were something obscene that is best left unnamed.

We agonise about 0.25% interest raises or about geopolitical factors leading to gas price increases and yet the trillions of dollars/euros/pounds created out of nothing by the central banks in the past few years are politely glossed over.

Gigantic quantitative easing, paired with unprecedented fiscal stimulus, has inflated money supply in all wester economies.

I still have to read a convincing argument that quantitative easing, especially when paired with fiscal stimulus, does not bring inflation as an inevitable consequence.

Anybody else feels this way?

[Mike4]

There is an elephant in the inflation room that people seem to avoid mentioning as if it were something obscene that is best left unnamed.

We agonise about 0.25% interest raises or about geopolitical factors leading to gas price increases and yet the trillions of dollars/euros/pounds created out of nothing by the central banks in the past few years are politely glossed over.

Gigantic quantitative easing, paired with unprecedented fiscal stimulus, has inflated money supply in all wester economies.

I still have to read a convincing argument that quantitative easing, especially when paired with fiscal stimulus, does not bring inflation as an inevitable consequence.

Anybody else feels this way?

Well this is certainly my thinking too, which is why I keep forecasting annual inflation rising soon to 10% for at least a few years. All the QE simply HAS to come out in the wash as inflation in my informed opinion as a plumber!

The bit I have trouble with is no-one seems to agree with me, least of all and most recently Vanguard with their latest inflation outlook, so how do I 'put my money where my mouth is' to take advantage of this difference of opinion? I guess one way is to borrow a load of money at fixed interest and lend it out at variable, but there must be a far easier way than that. I just don't know enough about it.

[ursaminortaur]

There is an elephant in the inflation room that people seem to avoid mentioning as if it were something obscene that is best left unnamed.

We agonise about 0.25% interest raises or about geopolitical factors leading to gas price increases and yet the trillions of dollars/euros/pounds created out of nothing by the central banks in the past few years are politely glossed over.

Gigantic quantitative easing, paired with unprecedented fiscal stimulus, has inflated money supply in all wester economies.

I still have to read a convincing argument that quantitative easing, especially when paired with fiscal stimulus, does not bring inflation as an inevitable consequence.

Anybody else feels this way?

Well this is certainly my thinking too, which is why I keep forecasting annual inflation rising soon to 10% for at least a few years. All the QE simply HAS to come out in the wash as inflation in my informed opinion as a plumber!

The bit I have trouble with is no-one seems to agree with me, least of all and most recently Vanguard with their latest inflation outlook, so how do I 'put my money where my mouth is' to take advantage of this difference of opinion? I guess one way is to borrow a load of money at fixed interest and lend it out at variable, but there must be a far easier way than that. I just don't know enough about it.

My understanding is that the past QE has already been priced into the past inflation - it basically neutralised what would otherwise have been deflation. If we use the old bathtub analogy. The plug wasn't fully blocking the plughole so water was leaking out of the bath(deflationary environment) - to solve this , on a temporary basis, extra water was allowed into the bath via the taps (QE). The plug problem has now been fixed and the taps (QE) turned off. The extra water that had been added in the past (QE) will not suddenly now cause the water level in the bath to rise spectacularly. It isn't past QE which is causing the present inflation but increased demand for energy etc associated with the world recovering from the slowing down of economic activity associated with covid and similar effects (in the UK brexit may also be seen as one such effect though that is peculiar to the UK - and to a much more limited effect the rEU).

[BT63]

...... I keep forecasting annual inflation rising soon to 10% for at least a few years. All the QE simply HAS to come out in the wash as inflation in my informed opinion as a plumber!

The bit I have trouble with is no-one seems to agree with me.....

Some of the inflation can be massaged out by the way figures are calculated.
Some of it can be destroyed in asset price declines or bad debts; the funny money first flowed into financial assets which in many cases now have bubble-like valuations, followed by some now spilling over into the cost of living.

It won't take many interest rate increases to pop the bubbles, resulting in severe asset price deflation which will take a lot of other inflationary pressures away due to the negative wealth effect, business failures, increasing unemployment etc.

I think the severely incompetent central bankers will manage to achieve the worst hybrid of everything, with medium inflation, negative real interest rates, declining asset prices, recession and rising unemployment. I think what is coming is one of the kind of economic setbacks which most people only see once or twice in a lifetime.

[dealtn]

Some of the inflation can be massaged out by the way figures are calculated.

Really? Care to explain please?

What changes to the way it is measured currently do you anticipate will occur such that the change to a less accurate measurement of inflation will massage it, and how will the public not notice?

[TUK020]

There is an elephant in the inflation room that people seem to avoid mentioning as if it were something obscene that is best left unnamed.

We agonise about 0.25% interest raises or about geopolitical factors leading to gas price increases and yet the trillions of dollars/euros/pounds created out of nothing by the central banks in the past few years are politely glossed over.

Gigantic quantitative easing, paired with unprecedented fiscal stimulus, has inflated money supply in all wester economies.

I still have to read a convincing argument that quantitative easing, especially when paired with fiscal stimulus, does not bring inflation as an inevitable consequence.

Anybody else feels this way?

Well this is certainly my thinking too, which is why I keep forecasting annual inflation rising soon to 10% for at least a few years. All the QE simply HAS to come out in the wash as inflation in my informed opinion as a plumber!

The bit I have trouble with is no-one seems to agree with me, least of all and most recently Vanguard with their latest inflation outlook, so how do I 'put my money where my mouth is' to take advantage of this difference of opinion? I guess one way is to borrow a load of money at fixed interest and lend it out at variable, but there must be a far easier way than that. I just don't know enough about it.

But is it an elephant or a mongoose?
A key question worth asking is "Inflation of what?"
The headline "inflation" discussed in the media is largely about current expenditure of consumer goods and services - CPI. This is what we seem to be heading for a bout of, exacerbated by supply shocks.
What we have had massive inflation of over the last decade and a half is in asset prices - equities, bonds, property etc.
When CB rates are jacked up to bring the former (CPI) under control, the latter may well crash. This will accelerate bringing the former under control by making everyone feel poorer.
What to do about it? now that's a question I wish I had an answer to

[NotSure]

It seems very hard to imagine positive real interest rates any time soon. That would lead to carnage in assets with knock on effects for everyone.

However, quantitative tightening (QT) can (and apparently will be) applied - as assets (bonds, gilts etc.) on central banks balance sheets expire, rather than rolling them over, as they have been (in addition to adding to them - QE), they will just let them expire, hence reducing their balance sheets. This should be deflationary even at constant IR. I'm guessing QT will still (at the least) blow any froth off of assset prices though.

[BT63]

Some of the inflation can be massaged out by the way figures are calculated.

Really? Care to explain please?

What changes to the way it is measured currently do you anticipate will occur such that the change to a less accurate measurement of inflation will massage it, and how will the public not notice?

Years ago we used RPI, which is now in the mid-7% range.
Now we use CPI which is in the mid-5% range.

2% annual inflation has been massaged away by changing the way inflation is calculated.

Let's face it: with government benefits/pensions tied to inflation and with some nations offering inflation-linked bonds, there's a lot of incentive to publish inflation numbers as low as possible.

[BT63]

What changes to the way it is measured currently do you anticipate will occur such that the change to a less accurate measurement of inflation will massage it, and how will the public not notice?

If house prices were to stagnate or start slowly declining, if I was in government I would add the cost of houses to the inflation figure, weighted according to the proportion of monthly expenditure typically spent on mortgages.

Or just change the weightings of various items used to calculate inflation; increase the weighting of items rising less and decrease the weighting of items rising more than average.

[scrumpyjack]

The last great inflation, in the seventies, was kicked off by the oil price shock. That caused prices to rise, accompanied by unions demanding pay rises to compensate and management giving them, so that the cycle of higher prices - higher wages - higher prices became embedded and UK inflation at one point hit 27%.

I think we are in severe danger of the same thing happening. We have already had the energy price shock but this time accompanied as you say by huge money printing. The only way this could not result in sustained high inflation would be if there was a large supply of cheap labour available so unions could not push up wages. Having left the EU that supply has been cut off. Possibly a rapid collapse in oil and gas prices might help but I can't see that happening, particularly as out stupid politicians think it is better to import oil and gas rather than use our own.

Then if the world notices our balance of payments situation it really will be the seventies all over again!

[BullDog]

The last great inflation, in the seventies, was kicked off by the oil price shock. That caused prices to rise, accompanied by unions demanding pay rises to compensate and management giving them, so that the cycle of higher prices - higher wages - higher prices became embedded and UK inflation at one point hit 27%.

I think we are in severe danger of the same thing happening. We have already had the energy price shock but this time accompanied as you say by huge money printing. The only way this could not result in sustained high inflation would be if there was a large supply of cheap labour available so unions could not push up wages. Having left the EU that supply has been cut off. Possibly a rapid collapse in oil and gas prices might help but I can't see that happening, particularly as out stupid politicians think it is better to import oil and gas rather than use our own.

Then if the world notices our balance of payments situation it really will be the seventies all over again!

Hmmm. Not so sure. In the 1970's lots of the stuff we bought was made in UK factories by UK workers in unions. From raw materials, chemicals, through the supply chain to goods in the shops. That's just not the case any more. I understand what you're saying. I just don't think UK wages are likely to have the same very direct and immediate influence on shop prices today. I am not sure exactly what this means, but I expect currency exchange rates have a very large influence on shop price inflation these days, more so than UK wages? Maybe?

[dealtn]

Some of the inflation can be massaged out by the way figures are calculated.

Really? Care to explain please?

What changes to the way it is measured currently do you anticipate will occur such that the change to a less accurate measurement of inflation will massage it, and how will the public not notice?

Years ago we used RPI, which is now in the mid-7% range.
Now we use CPI which is in the mid-5% range.

2% annual inflation has been massaged away by changing the way inflation is calculated.

Let's face it: with government benefits/pensions tied to inflation and with some nations offering inflation-linked bonds, there's a lot of incentive to publish inflation numbers as low as possible.

The independent ONS still publishes RPI. It's not hidden away. If you, or anyone else for that matter, considers it a better measure (I and most professionals don't) you can still find it. Indeed many government expenditures are still tied into it - so even the incorrectly labelled massaging doesn't reduce the governments expenditure on lots of things, including its debt obligations.

Lets face it: the government doesn't either measure or publish the inflation data.

Your comments on including housing may or not be relevant, but you will be pleased to know (I think) the ONS also incorporates housing costs, including imputed rent, into its inflation calculations. Consider CPIH for instance.

[gryffron]

Hmmm. Not so sure. In the 1970's lots of the stuff we bought was made in UK factories by UK workers in unions. From raw materials, chemicals, through the supply chain to goods in the shops. That's just not the case any more. I understand what you're saying. I just don't think UK wages are likely to have the same very direct and immediate influence on shop prices today. I am not sure exactly what this means, but I expect currency exchange rates have a very large influence on shop price inflation these days, more so than UK wages? Maybe?

Not sure I agree. About 30% of what we buy is imported, which means 70% is still domestically produced. Inflation includes services as well as goods. And if public sector workers get pay rises we all ultimately pay for that too.

Gryff

[scotview]

A lot of what we buy comes from China. The price is usually very low and the quality is generally very good.

There is no way that these items could be made in the UK for those low prices.

I have a feeling though that the price of those rock bottom Chinese imports might soon start to creep up.

[scrumpyjack]

A lot of what we buy comes from China. The price is usually very low and the quality is generally very good.

There is no way that these items could be made in the UK for those low prices.

I have a feeling though that the price of those rock bottom Chinese imports might soon start to creep up.

Indeed, and of course most of the 'cost' of what we buy is the costs added here, not the basic import cost. That is why specs bought at Specsavers cost £225 whilst the ones I just bought online (made in Pakistan and sent to me) cost £20 (varifocals, lens coatings etc - just as good).

[AsleepInYorkshire]

A lot of what we buy comes from China. The price is usually very low and the quality is generally very good.

There is no way that these items could be made in the UK for those low prices.

I have a feeling though that the price of those rock bottom Chinese imports might soon start to creep up.

If the USA continues to raise interest rates and China's growth falls below 7.5% there's always the possibility that they start to feel some pain by not servicing their debts. In such circumstances why would China raise it's selling prices?

AiY(D)

[scotview]

I still have to read a convincing argument that quantitative easing, especially when paired with fiscal stimulus, does not bring inflation as an inevitable consequence.

In addition to the real and inevitable inflation risk, it seems to me that QE etc has not been to the benefit of the ordinary person but has facilitated huge wealth growth for a small proportion of the world population. I am not sure if this is coincidental or has been engineered.

[scrumpyjack]

I still have to read a convincing argument that quantitative easing, especially when paired with fiscal stimulus, does not bring inflation as an inevitable consequence.

In addition to the real and inevitable inflation risk, it seems to me that QE etc has not been to the benefit of the ordinary person but has facilitated huge wealth growth for a small proportion of the world population. I am not sure if this is coincidental or has been engineered.

I guess the argument would be that if QE had not taken place it would have been catastrophic for the ordinary person (businesses going bust, employees losing their jobs, mortgages unpaid, personal bankruptcies etc etc) so to that extent it can be argued that ordinary people have been the greatest beneficiaries.

[BT63]

I guess the argument would be that if QE had not taken place it would have been catastrophic for the ordinary person (businesses going bust, employees losing their jobs, mortgages unpaid, personal bankruptcies etc etc) so to that extent it can be argued that ordinary people have been the greatest beneficiaries.

If economies had been sensibly managed in the past (not allowing high levels of debt/leverage pretending its effect was real growth, not trying to avoid even a slight recession, not trying to prevent stock market declines >20%) then there wouldn't have been a need for QE.

[seldomrite]

Quantitative tightening involves the government paying the principal of a bond back to the central bank and then the central bank removing the money from the system.

Will it ever happen on a significant scale? At a time when government debt is balooning?

Call me cynical, but I have my doubts...