Inflation and the post-pandemic economy: a response to Brian Griffiths 

In his latest essay for TheArticle, “A new age of inflation”, Brian Griffiths argues that rising inflation is not just a temporary phase, as the economy recovers from the pandemic, but here to stay for some time to come. I fear that he is right. As a CEO, I see the signs of inflation all around, as businesses return from lockdown – restaurants, bars, hairdressers all looking to raise prices to make up for lost time; used-car dealers pushing up prices, as more people avoid public transport, and the chip shortage and expensive environmental legislation, make new cars ever more expensive; commodity prices being squeezed upwards; taxes rising; wages rising to meet the costs of the above; and a lack of new immigrants looking for work.

Productivity is not soaring to offset these costs. Instead I see the economy being hampered for years to come, whether through dealing with Brexit issues (although I believe that, in time, Brexit does offer the UK new opportunities), dealing with the direct impact of Covid itself, dealing with working from home and in the office, or dealing with poor transport post-pandemic. Finally, we are dealing with environmental legislation, ever more corporate governance and an increasingly litigious country.

Working age populations in so many countries are falling, including China, which I think has been the real engine of deflationary forces over the last 20-plus years. I don’t believe the successor countries with rising working age populations in India, Africa and the Middle East have the legal, political or economic frameworks to replace China as the next deflationary force.

Just-in-time methods in industries, and the lack of investment globally over the last 10-plus years, as companies have been pruned to meet the demands of the stock market or private equity investors, have left the economy ill-equipped to respond to increasing demand.

What are the remedies? Politicians of all parties are weak. Spending excessively and stoking inflation are the easy ways out. Central banks, too, have been hobbled, as Lord Griffiths so clearly points out. Many central bankers are confident the current inflation is temporary, as it has been a few other times over the last 25 years when it has reared its head. However, I’m far less sure that this time they are correct. I agree with Griffiths that many people in a position to do anything about inflation have no memory of or scars from past inflations. At a social level, the “squeezed-middle” will think it is about time their salaries and wages rose to keep up with the rising cost of living. They will vote for politicians who support that agenda. This will inevitably lead to a push-back against the status quo of the last 25 years.

I don’t believe the current monetary and fiscal policy experiments will end well, as markets have got dangerously unbalanced and mispriced. Quite how that will unwind is difficult to think through. Japan has demonstrated that it is possible to deal with such issues, slowly and patiently. I’m not sure other Western politicians, or indeed Western capital markets, will be so patient.

This environment makes me keener on real assets and less keen on cash or low-yielding debt. Surprisingly, the bond market doesn’t agree with this analysis — and I’ve always thought the bond market is the most rational of markets. However, it is questionable whether proper signals are being received from the bond market, as it has been taken over by the central banks.  And this very fact is another reason to be concerned. 

Central bankers’ words alone have historically moved the bond market to do much of their heavy lifting in terms of slowing down the economy, without the central banks having to raise rates. This strong aspect of central banks’ power and control has been switched off by their own actions in buying billions and billions of dollars of debt. So the bond market is no longer something to be feared. Instead, it is offering more fuel to the fire in allowing businesses and consumers to borrow like mad at very low interest rates.

So I do see inflation persisting for some time. Like Griffiths, I don’t think it will be at super high levels but if it persists it could still have damaging effects. An unexpected shock could make this worse.  Conflict with Russia, China or in the Middle East could all trigger inflation. OPEC could yet spring such a shock, although as the economy decarbonises that is probably less likely.

I hope that Brian Griffiths and I are both wrong, as rampant inflation is the worst outcome for any economy.  Unfortunately, I don’t see who is going to prevent it unless the central banks have a material change of heart. To do that, they will have to ignore the other objectives that have been set for them by politicians.

Russell Gurnhill is the CEO of Telereal Trillium.The views expressed in this article are his own.

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