The sky’s the limit

There’s been a lot of talk and posturing over inflation. June results show the UK experienced a 2.5% increase in the i-word. Housing has also increased by 0.9% in May, bringing it to a nice round 10% up-only on the year from May 2020. This 2.5% is higher than expected — but not by enough for the context of inflation being transitionary to be changed in a meaningful way — and the Bank of England still expects inflation to reach 3% as we spend our way out of lockdown before calming down. Yet outgoing BoE Chief economist, Andy Haldane, predicts at least 4%. Dio mios, my poor English heart (and head) just can’t take this toing and froing after last Sunday.

Ultimately it seems to come down to “do you think this inflation is transitional?” — Bitcoin’s continual ranging, with downward on the days of the US and UK announcements, NASDAQ doing well and gold staying relatively motionless (fancy that), bond yields are pretty much unchanged too. All suggest that the market believes inflation IS transitional — and bitcoin’s ‘inflation hedge narrative is not needed right now. This makes sense if you consider there to be (1) a current oversupply of money and (2) an undersupply of goods and labour — which adds up. The latter is a temporary covid consequence and once the world adapts, we will return to the (global) over-supply of goods and labour that has kept inflation so low for so long.

The former is where my noggin’ gets a good scratchin’. Although the saving rate is high due to government intervention, the money has only replaced what was lost during economic lockdowns; this excess will likely peter out quickly once consumers have exhausted Primark and, more importantly, everyone is faced with repaying emergency loans, business rates, VAT, deferred payments etc. All the ammunition used by the government early on has to be factored in eventually, right?

As a result, the government has a lot of debt which constrains future spending and is disinflationary. Of course, governments could just continue to issue debt and print money which has been the Biden way so far. A lot of that money is going on infrastructure projects, which is great! Infrastructure projects typically improve productivity for nations on the whole and create wealth and therefore taxes! However, the UK doesn’t have any extravagant infrastructure plans on the scale of the US (over budget railway upgrades still aren’t on the scale and have been quite the drain already, so ‘buy-back’ time is up in the air).

So, more money is going into renewables. Renewables simply have to be productive, right? Our very lives depend on it as we’re constantly told — so it has to be productive. Industries and individuals are in a constant state of nudge or policy flux to make long-term changes to their energy mix and use. The UK will be supporting this with the green bond but so far that hasn’t been than the usual bluster and the government are still providing subsidies for all sides of the energy mix. What’s more, they’re currently more about ‘levelling up’ — who quite knows what that means. Either way, as we know with crypto-miners searching out cheap and renewable energy sources, a free market should take care of this — and one would assume human/mass extinction is not in the market’s interest. It means we should be paying less for our energy, both in our pocket and environmental costs, in the near-ish future.

That shouldn’t matter though as the UK has been a net importer of goods, especially food, oil, and gas, so any inflation globally will be imported here anyway. The oil price remains fundamental to everything, it is a function of; demand, politics, and policy. Russia wants higher prices, the Saudi’s are concerned a higher price brings more shale producers into play. US shale producers have a much quicker turn time to market than oil fields so any spike in oil prices, again should, be short-lived.

Looking back at some stats from June 2020 also reminds me that we were in the depths of covid crisis and panic mode, markets hadn’t recovered much from the March crash by then and people were spending far less and saving more as uncertainty reigned. So a spike in the year-on-year inflation makes sense and long-term inflation should level to the norm.

In terms of the labour shortage, again furlough and the fire-bomb approach of money spending has meant there is more of a shortage of incentivised labour as opposed to an actual labour shortage. Low-paid hospitality and transport workers can’t be very inclined to switch off Netflix to go work long hours in close contact with a frustrated and demanding public. This should reverse at some point. Piling up bills and loss of covid-related benefits should be enough to get people back into employment. Albeit people may feel overqualified but as shown the last time jobs started taking applications there was ample demand from people willing to take a step down in order to get back on the ladder.

In terms of transport workers and supply-chain issues, one could say Brexit is a factor, which it is, but ultimately transportation and supply-chain is currently a global issue. Why it takes so long to re-establish ships moth-balled during covid is a complete guess to me — maybe the tight, dirty, and cramped conditions meant less were willing to take the risk? The simpler (and I think more likely) is that shipping lanes are restricted to claw back lost profits. Also, shipping isn’t exactly an agile and low-barrier industry where new entrants can boost competition.

So everything is fine? Right?

Then why does nothing feel right? Why has (no exaggeration) every train I have been on in the last 3 months been delayed, canceled, or redirected AND cost considerably more than previously? Why has every central bank’s prediction on the rate of inflation been incorrect so far? Why am I being constantly reminded this is transitionary when at the same time there are sweeping changes being made across entire industries in terms of structures, scales, and efficiencies?

One can’t help but imagine a ballroom of people nervously laughing and shuffling slowly towards the door, looking around and shifting their eyes left to right, hoping they’re in a good enough position to get out before the stampede blocks the door. What was it that bloke from ’07 say? “Got to keep dancing while the music is playing” — there’s still ample money pinging through the system so the sound system can be kept on for a while longer.

Essentially I haven’t convinced myself of anything, and I doubt you have either. I’ll throw this one over to an unhealthy mix of Brandolini’s Law and Dunning-Kruger effect. At the very least I can take solace that it is becoming clear not many people at all have any idea of what is going on (in my bitcoin domain at least). I’ll keep on stacking sats in the meantime, that makes the most sense to me.