Mark Robinson: 9 reasons inflation-deniers are defying reality

Robert McLean

#cee, #proptech, #development a #architecture

Back in May, I spoke with Mark Robinson of Encor Wealth Management about the worrying signs of inflation. At the time, we didn’t know that developers in Prague and Bratislava were already beginning to have serious problems getting subcontractors and suppliers to commit to delivery times and set prices. But the monthly statistics were already becoming a concern. At the time, Robinson said there were two schools of thought. The first was that there would be a transitory bout of inflation (caused by Covid-induced supply chain shock), but then things would go back to normal.

Robinson didn’t buy that argument, even in May. “I’m in the other camp,” he told me then. “I believe there is more sustained inflation coming and that the world economy is going to have a big problem in a few months’ time. It won’t be transitory and the central banks will have to work out what to do.”

Since then, the Czech National Bank has taken decisive action against the threat of inflation, raising interest rates on numerous occasions. In November, it floored observers with a 125 basis point hike to 2.75%. Tomorrow (Dec. 22), the Czech National Bank will hold its final rates meeting of the year and the general consensus is that the increase could be as much as 75 bps. These are not the moves of a group who think inflation is transitory.

In one of his recent columns, the Bloomberg pundit John Authers says those who previously claimed the inflation bump was transitory are sticking to their story. Now, however, he says economists are saying the transitory period may last for a year or so but it will subside because we’ve survived the worst of the supply chain shock.

Mark Robinson isn’t having it. He writes:

1) Inflation has reached levels where even a “peaking” is becoming less important relative to the period of time it spends “returning to normal.” Most commentators (including me) are too young to remember sustained periods of inflation and their psychological effects, not least on wage hike negotiations. The ECB presents a view where inflation magically returns to 2% without them doing anything restrictive (aside from removing some stimulus slowly, starting in H2 2022, when the inflation rate will already, according to them, be lower than now). What if in Europe the rate instead does not reach 2% until 2024 or 2025?

2) All of the major central banks (Fed, ECB, BoE, BOJ) are still stimulating economies by monetary actions. The first one who will stop is the Fed, in April 2022. That’s right, they are all still adding to the inflation fire between now and then. The ECB is stimulating out to 2023, it looks like. The BoE, very strangely, raised interest rates yesterday (admittedly to a puny 0.25%) but is still stimulating via QE.

3) It has been very rare that producer price inflation episodes end without higher consumer prices and there is a lag of 1-12 months on CPI from PPI figures. For November, German PPI was 19.2% yoy, China PPI was 12.9% yoy, Czech PPI was 13.5% yoy, US PPI was 9.6% yoy. November CPI in these 4 countries was 5.2%, 2.3%, 6.0%, 6.8%. The gaps between these numbers are huge in some cases. So, either, consumers absorb some of the price increases or the producers take a big hit to margins. If the former, the CPI picture gets worse, if the latter, recession and credit defaults.

4) Government spending: are governments normalizing budget deficits in 2022? Japan is not. Biden still looks to launch BBB. The EU is not demanding fiscal austerity all the while COVID is with us. Government budget deficits are inflationary by nature, so this force that can propel prices higher will still be with us next year. And maybe the year after?

5) Energy price inflation: some of it is immediate (e.g. petrol pump prices), some if it takes a few months (e.g. household electricity bills) some of it takes longer (into the industrial production chain). Figures I am seeing suggest the PPI figures in 3) might get worse in coming months

6) Climate change initiatives: the drive remains to reduce fossil fuel production (and consumption). This forces up the price of energy on a 1-5 year view unless there is huge investment in alternatives. This takes up to a decade to occur. There is a timing mismatch that is contributing to inflation.

7) How many of these economies have workforces that are unemployed in massive numbers? Not CZ. Not the US. Germany has 5.3% unemployment. Unless COVID really disrupts things again, labour forces will be forcing up wages through 2022. Does this picture change in 2023? Or when economies open fully post-COVID? No.

8) In no central bank models (except perhaps the CNB beyond 2022) are interest rates exceeding inflation rates in the short to medium term. In other words, “real interest rates stay negative” throughout the next 1-4 years. In the 1970s and 1980s, inflation was only conquered with interest rates higher than inflation rates. At the moment, everyone seems to anticipate that inflation will come under control with the Fed hiking to around 2% and the ECB doing no hiking. Well, we will have to wait 2 years to see whether this policy works. I don’t know whether it will work. It might do. It might not. What we do know is that it did not work in the early 1970s and interest rates (under Volcker) then had to be hiked massively in the US.

9) “Real interest rates stay negative” is the assumption boiled into every asset class (bonds, equities, real estate, private equity). If that assumption is challenged, all of these asset classes will come under severe pricing strain.

As you can see, I am not convinced that this inflation episode is “transitory” due to the supply chain bottleneck being behind us. The only way many of the above factors disappear is a big demand hit (full COVID lockdown / war) in which case the supply bottlenecks come back again to a new peak… The only other scenario where inflation has peaked now is if we have a full-blown economic recession where consumers stop buying now. Which Authers referred to in his article as the “resurgent economic growth will also be transitory”.

Support ThePrime. Get access to the entire archive. Only €8/month!

You May Also Like…