The Lemon Fool

There's little sign of respite, it seems.

US Jan CPI printed 7.5% vs 7.3% consensus

In a recent interview on the Moneyweek podcast it was pointed out that the current spread between German CPI and producer prices is something staggering.. like 6 standard deviations above the norm, with CPI around 5%, so even if that just gets split down the middle we could see double digit inflation in the Eurozone in the not too distant future.

With a commodities bull market now well underway and central banks so far behind the curve (intentionally so), there is no reason at all to think that inflation will return to pre-pandemic levels in the foreseeable future.

Everything I'm seeing through day2day is going up. Arguably more so than what get stated in the news.

The yields on most developed countries' debt seems to jumped up a bit in the past few hours.

Matt

TheMotorcycleBoy wrote:The yields on most developed countries' debt seems to jumped up a bit in the past few hours.

So now we're only looking at -6% real return from short-term bonds instead of -7%.

Or, in other words, it now takes 11 years for bond holders to lose half their purchasing power instead of 10 years.

Bonds continue to be certificates of confiscation.

However, a good old crash brought on by over-eager interest rate rises would produce a huge negative wealth effect which would bring inflation down.

BT63 wrote:So now we're only looking at -6% real return from short-term bonds instead of -7%.

Or, in other words, it now takes 11 years for bond holders to lose half their purchasing power instead of 10 years.

Bonds continue to be certificates of confiscation.

Only if inflation continues to remain high and bond yields remain low.

A not marked to market 10 year Gilt ladder (average maturity 5 years) since 2008 has yielded +0.7% annualised real. Last 5 years -0.6%. Last 3 years also -0.6%.

If stocks decline -25% (nominal) then even hard cash sees its stock purchase power increase +33.3%. If -32% (0.68) real then 0.994 bond value = 46.2% relative gain.

1nvest wrote:

BT63 wrote:So now we're only looking at -6% real return from short-term bonds instead of -7%.

Or, in other words, it now takes 11 years for bond holders to lose half their purchasing power instead of 10 years.

Bonds continue to be certificates of confiscation.

Only if inflation continues to remain high and bond yields remain low.

A not marked to market 10 year Gilt ladder (average maturity 5 years) since 2008 has yielded +0.7% annualised real. Last 5 years -0.6%. Last 3 years also -0.6%.

If stocks decline -25% (nominal) then even hard cash sees its stock purchase power increase +33.3%. If -32% (0.68) real then 0.994 bond value = 46.2% relative gain.

Since when were financial assets included in measures for the price of living?

All that matters at the end of the day is the goods and services you can buy for your money. If stock, bonds, and other assets help you to increase your real purchasing power then great - that's the idea of investing, but if your stocks go down just as fast as your purchasing power goes down then that isn't a good thing at all.

There is no alternative really. The debt is too high.

1nvest wrote:

BT63 wrote:So now we're only looking at -6% real return from short-term bonds instead of -7%.

Or, in other words, it now takes 11 years for bond holders to lose half their purchasing power instead of 10 years.

Bonds continue to be certificates of confiscation.

Only if inflation continues to remain high and bond yields remain low.

A not marked to market 10 year Gilt ladder (average maturity 5 years) since 2008 has yielded +0.7% annualised real. Last 5 years -0.6%. Last 3 years also -0.6%.

If stocks decline -25% (nominal) then even hard cash sees its stock purchase power increase +33.3%. If -32% (0.68) real then 0.994 bond value = 46.2% relative gain.

Mind you 10yr yields are absolutely motoring now though aren't they?

On marketwatch.com right now I'm seeing US at almost 2.02% and UK at almost 1.6%.

Matt

Whilst I don't know whether all that this lady is saying is true, the video is very hippyish at the end. But here goes:

https://www.youtube.com/watch?v=Fi3RvBcHsdA

I do believe the statement that inflation is higher than what we are being told.

Matt

UK PPI was 9.3%, USA PPI was 9.7%, Chinese is 10%
A lot more inflation is transitioning along to the consumer

If it persists for a few years then there is probably no easy way to avoid a loss in wealth unless you have above (true) inflation pay rises

anon155742 wrote:UK PPI was 9.3%, USA PPI was 9.7%, Chinese is 10%
A lot more inflation is transitioning along to the consumer

If it persists for a few years then there is probably no easy way to avoid a loss in wealth unless you have above (true) inflation pay rises

Is the first P for producer then? IOW it's the inflation seen in the factory.

Matt

TheMotorcycleBoy wrote:Hi folks,

I'm definitely no economics expert [*], but is it possible that the easing currently being implemented combined with supply shortages will engender inflation over the next few months?

....

Well, I guess I might have been onto something in my OP! But perhaps I should have said over the next few years instead.

My worry now is that CBs are possibly doing the wrong thing to tackle this problem. Perhaps they should be focussed on only QT, but leave rates alone, since is it not more likely the case that inflation from this point is only supply based and no longer due to surplus market liquidity?

It seems that raising rates will make things worse. For example, if alternatives are required for energy and food should not firms be able to raise capital to invest in such things at a reasonable interest rate?

Matt

TheMotorcycleBoy wrote:

TheMotorcycleBoy wrote:Hi folks,

I'm definitely no economics expert [*], but is it possible that the easing currently being implemented combined with supply shortages will engender inflation over the next few months?

....

Well, I guess I might have been onto something in my OP! But perhaps I should have said over the next few years instead.

My worry now is that CBs are possibly doing the wrong thing to tackle this problem. Perhaps they should be focussed on only QT, but leave rates alone, since is it not more likely the case that inflation from this point is only supply based and no longer due to surplus market liquidity?

It seems that raising rates will make things worse. For example, if alternatives are required for energy and food should not firms be able to raise capital to invest in such things at a reasonable interest rate?

Matt

They royally effed up by being too loose even as we had the hottest economy/stock market/housing market/labour market in the last generation. Of course none of it was sustainable and now they are going to have to try to tighten into an economy that is already heading into recession.

In short, they've forgotten the whole point of monetary policy - to run countercyclical to the natural economy cycle. You are supposed to run tighter monetary policy during the expansive phase and then accomodative policy during the recessionary phase.

Instead, what we have tended to have is a policy that is too lose during economic expansion and then FAR too lose during economy contraction... and in the past cycle we had policy that was far too loose during the expansion which has stoked all this inflation... and now they have nowhere left to go but to tighten as we head into the contraction phase.

vand wrote:Instead, what we have tended to have is a policy that is too lose during economic expansion and then FAR too lose during economy contraction... and in the past cycle we had policy that was far too loose during the expansion which has stoked all this inflation... and now they have nowhere left to go but to tighten as we head into the contraction phase.

Just seems so wrong right now, given that inflation is 99% supply side. I hope the BoE, ECB and the FR can hear me!

TheMotorcycleBoy wrote:Just seems so wrong right now, given that inflation is 99% supply side. I hope the BoE, ECB and the FR can hear me!

Good subject for a poll, tighten or not ?

TheMotorcycleBoy wrote:

vand wrote:Instead, what we have tended to have is a policy that is too lose during economic expansion and then FAR too lose during economy contraction... and in the past cycle we had policy that was far too loose during the expansion which has stoked all this inflation... and now they have nowhere left to go but to tighten as we head into the contraction phase.

Just seems so wrong right now, given that inflation is 99% supply side. I hope the BoE, ECB and the FR can hear me!

I agree it is mainly currently supply side, caused almost entirely by high gas prices. Switzerland, which produces its own electricity*, has an inflation rate of only 2.4%.

But thereagain, the Swiss never went in for QE either, so they run much less risk of inflation expectations becoming ingrained. Like much of the World, we went in for QE, and to get that genie back into the bottle will require a lot higher interest rates IMHO.

*from hydro and nuclear, though I don't quite understand why their electricity prices are detached from those of its European neighbours.

Nimrod103 wrote:

TheMotorcycleBoy wrote:

vand wrote:Instead, what we have tended to have is a policy that is too lose during economic expansion and then FAR too lose during economy contraction... and in the past cycle we had policy that was far too loose during the expansion which has stoked all this inflation... and now they have nowhere left to go but to tighten as we head into the contraction phase.

Just seems so wrong right now, given that inflation is 99% supply side. I hope the BoE, ECB and the FR can hear me!

I agree it is mainly currently supply side, caused almost entirely by high gas prices. Switzerland, which produces its own electricity*, has an inflation rate of only 2.4%.

Don't forget Ukrainian/Russian grain, Russian metals, and Ukranian manufactured exports (they make a lot of vehicle parts apparently).

So actually I think the supply side issues are more complex.

I'm guessing that large demand for certain precursors by Arms manufacturers who will now be producing more, could possibly be squeezing metals, organic chemicals, semiconductor supplies even more (?).

Matt

TheMotorcycleBoy wrote:

Nimrod103 wrote:

TheMotorcycleBoy wrote:

vand wrote:Instead, what we have tended to have is a policy that is too lose during economic expansion and then FAR too lose during economy contraction... and in the past cycle we had policy that was far too loose during the expansion which has stoked all this inflation... and now they have nowhere left to go but to tighten as we head into the contraction phase.

Just seems so wrong right now, given that inflation is 99% supply side. I hope the BoE, ECB and the FR can hear me!

I agree it is mainly currently supply side, caused almost entirely by high gas prices. Switzerland, which produces its own electricity*, has an inflation rate of only 2.4%.

Don't forget Ukrainian/Russian grain, Russian metals, and Ukranian manufactured exports (they make a lot of vehicle parts apparently).

So actually I think the supply side issues are more complex.

I'm guessing that large demand for certain precursors by Arms manufacturers who will now be producing more, could possibly be squeezing metals, organic chemicals, semiconductor supplies even more (?).

Matt

Presumably Switzerland is suffering the same supply side issues, so why the difference? I can only explain it in terms of the price of gas, which makes the difference between 2.4 and our 9%. But if the BoE don't act to restrain wage growth now, our inflation rate will only very slowly decline.

Nimrod103 wrote:

TheMotorcycleBoy wrote:

Nimrod103 wrote:

TheMotorcycleBoy wrote:

vand wrote:Instead, what we have tended to have is a policy that is too lose during economic expansion and then FAR too lose during economy contraction... and in the past cycle we had policy that was far too loose during the expansion which has stoked all this inflation... and now they have nowhere left to go but to tighten as we head into the contraction phase.

Just seems so wrong right now, given that inflation is 99% supply side. I hope the BoE, ECB and the FR can hear me!

I agree it is mainly currently supply side, caused almost entirely by high gas prices. Switzerland, which produces its own electricity*, has an inflation rate of only 2.4%.

Don't forget Ukrainian/Russian grain, Russian metals, and Ukranian manufactured exports (they make a lot of vehicle parts apparently).

So actually I think the supply side issues are more complex.

I'm guessing that large demand for certain precursors by Arms manufacturers who will now be producing more, could possibly be squeezing metals, organic chemicals, semiconductor supplies even more (?).

Matt

Presumably Switzerland is suffering the same supply side issues, so why the difference? I can only explain it in terms of the price of gas, which makes the difference between 2.4 and our 9%. But if the BoE don't act to restrain wage growth now, our inflation rate will only very slowly decline.

Gas might be enough to make the difference
- last I looked it was a very minor part (less than 5% I think) of a source for Swiss electricity but I haven't looked at direct use for heating

There's also the possibility their other trading might have taken on fewer recent costs increases relative to the UK (their bilateral agreements with the neighbours being long standing and well bedded in)

- sd

servodude wrote:

Nimrod103 wrote:

TheMotorcycleBoy wrote:

Nimrod103 wrote:

TheMotorcycleBoy wrote:Just seems so wrong right now, given that inflation is 99% supply side. I hope the BoE, ECB and the FR can hear me!

I agree it is mainly currently supply side, caused almost entirely by high gas prices. Switzerland, which produces its own electricity*, has an inflation rate of only 2.4%.

Don't forget Ukrainian/Russian grain, Russian metals, and Ukranian manufactured exports (they make a lot of vehicle parts apparently).

So actually I think the supply side issues are more complex.

I'm guessing that large demand for certain precursors by Arms manufacturers who will now be producing more, could possibly be squeezing metals, organic chemicals, semiconductor supplies even more (?).

Matt

Presumably Switzerland is suffering the same supply side issues, so why the difference? I can only explain it in terms of the price of gas, which makes the difference between 2.4 and our 9%. But if the BoE don't act to restrain wage growth now, our inflation rate will only very slowly decline.

Gas might be enough to make the difference
- last I looked it was a very minor part (less than 5% I think) of a source for Swiss electricity but I haven't looked at direct use for heating

There's also the possibility their other trading might have taken on fewer recent costs increases relative to the UK (their bilateral agreements with the neighbours being long standing and well bedded in)

- sd

The difference in cpi is entirely due to the price of electricity: https://www.efginternational.com/uk/ins ... n-low.html

The evidence shows that energy prices are fundamental in explaining the differences in inflation, especially between Switzerland and the eurozone. This is almost totally due to differences in the price of electricity. In February and March, the price of electricity in Switzerland rose by only 2.4% year-on-year while in the eurozone it surged by 34.3% year-on-year in February and has likely risen further in March. The gap was even wider for producer prices of electricity: in February, the wholesale price of electricity in Switzerland was 3.1% higher than a year before, while in January in the eurozone the increase was as much as 83.2% year-on-year.

It shows how an indigenous source of energy is important to prosperity and survival.

Edit to add, as an aside, how does Switzerland generate enough electricity in the Winter when the hydro is all frozen?

Nimrod103 wrote:
It shows how an indigenous source of energy is important to prosperity and survival.

Interesting.

On a practical note, we have just received our new capped rates from Scottish Power. Electricity standing charge has gone from 26p to 50p/day , while gas standing charge has hardly changed at around 27p/day.

So some of this "energy" inflation seems to be entirely discretionary.