Stagflation

Some time ago I believed the term coined in 1970s would become the thing of the past, explored by students of economics and occupying few pages in their textbooks. The stagflation in 1970s arose from a negative supply shock and was successfully combated by tight monetary policy and drawing back on economic liberalism. The price to pay was a rise in unemployment and downfall of inefficient, uncompetitive industries.

Rings a bell? In 1970s real negative interest rates were prevalent in developed economies, as they are today. In 1970s a surge in oil prices contributed to the stagflation; today disrupted supply chains and shortages of several components might produce a similar outcome.

The two comparisons might misguidedly suggest the today’s situation is parallel to what was witnessed over 40 years ago, while it is not.

The COVID-19 pandemic, especially in its early phases, prompted unprecedented government stimulus programmes. As several sectors of economies were brought to a halt to curb the spread of the virus, the governments had to feed mouths of those who were forbidden to work. If the link between the output and the money is broken, it means the supply of money on the market is not counterbalanced by goods or services produced and so prices inevitably rise. This has happened with a delay of a few quarters.

Frail economies of several countries were propped up by ultra-loose monetary policies, giving relief to debtors and inducing those holding cash to spend it. I suppose there are other precisely targeted measures to help out those devoid of stream of revenues. If you earn no money it does not matter much whether the interest rate on your debt is 3% or 0%.

Although the pandemic has been brought under some control in several countries, supply chains continue to be disrupted. Lack of semi-conductors, disruptive for several industries, brings supply of several goods down, which, holding everything else unchanged, pushes their prices up.

Also the climate change and efforts to slow the AGW down begin to have impact on prices of energy and fossil fuels. The time has come to pay the bill for exploitation of the planet. Prices of several goods will need to incorporate the harm done to the planet by the consumers.

As a banker I have industry insights which are out od reach for an ordinary man. I closely see how soaring prices of some raw materials send profitability of some companies up and others down. On some markets where prices increased by a few hundred percent over the recent year, buyers said they’d had enough and would rather cease to manufacture rather than produce with a loss if they are unable to pass the rising cost of raw materials to off-takers. Such phenomena are a clear signal stagflation might be in the offing.

The inflation will always have its beneficiaries, but most economic actors lose on it. Usually those better off are debtors and worse off are their creditors. On top, the poorest suffer the most. Prices of dwelling upkeep and basic food have risen by more than 6% over the recent year, hitting the wallets of the underprivileged.

I am grateful for my wisdom and intuition thanks to which I invested my savings in inflation-linked government bonds which in 2022 will pay me coupons up to 8%, with risk and liquidity profile far superior to a residential property which is considered the main alternative to bank deposits in Poland