Inflation
Some useful thinking points on inflation.
Currently, inflation is running at c6% in the US, per annum. That’s a lot.
It is also quite high in other parts of the world, suggesting that high inflation in the US is not necessarily entirely to do with US fiscal or monetary conditions.
The basics: there is a high demand for goods, since services can’t easily (reliably) be provided or consumed. This means higher prices, given that goods supply cannot readily absorb such large sectoral reallocations.
So what, other than tighter monetary policy, can be done to help ease the bottlenecks?
What to do
Well, get everyone vaccinated, for a start. If people are safe, they can safely go back to doing things other than buying goods, which should help with pricing pressure.
That would also help get a lot of parents back into the workforce, as kids (who have been taken out of day-care) can go back safely.
In other words, it would get the supply of labour back to pre pandemic levels.
Immigration is another, both from state to state as well as country to country.
Closed borders means less influx of workers, for countries dependant on skilled migration. Australia is feeling this quite keenly (WA FIFO workers), as is the UK (nurses from Eastern Europe).
Removal of tariffs is yet another. The US placed sizeable tariffs on aluminium and steel, from China, and China placed considerable tariffs on Australian commodities (coal, wine).
The tariffs simply raise prices for consumers, and were born of political ill-will. Reciprocal tariff removal would help.
Conclusion
Why mention any of this?
Well, one, we find clients occasionally ask. “How will they get inflation down, unless it is using higher interest rates?” Usually, the end client is thinking of markedly higher rates that crush risky assets, and has an underlying desire to (often dramatically) de-risk the equity allocation.
So, it helps to understand the drivers of what is and isn’t likely.
The tariffs part is a key focus for us in terms of predicting commodity prices. Removal would mean lower steel prices, and hence likely lower returns from steel producing stocks.
So there is a stock and sector / asset class consideration as well.
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