April 10, 2024 - 10:00am
In a sign that life is slowly returning to a semblance of normality, food price inflation has now dropped back below where it was when Russia invaded Ukraine. The wartime fall in agricultural exports from Ukraine, which in its former life was known as the breadbasket of the Soviet Union, had worsened pandemic-era inflation, raising the spectre of hunger in some import-dependent nations.
But with exceptions, food prices are now not only rising at a more tempered pace, and in some cases are even falling. Prices of meat and fish, among other items, recently began dropping in Britain and the United States, much to the relief of strapped consumers.
That said, we probably won’t breathe easier for a while. We’ve all been scarred by the memories of the last couple of years, when inflation reached double digits. And despite those recent falls, prices remain well above where they were before the surge began.
All the same, this inflation was always bound to run its course. Most of it was supply-related, caused by the bottlenecks that resulted from the pandemic’s collapse in global trade. Not only did these bottlenecks gradually work their way through trade pipelines but central banks, initially caught sleeping at the wheel by price-rises they misdiagnosed as “transitory”, raised interest rates to squeeze demand, and helped to restore balance to the market.
Still, it will be only a semblance of the old normality. Inflation appears to be settling at a higher level than it did in the recent past, when central banks set targets of keeping inflation around 2%, with interest rates only slightly above that. It’s more likely that inflation will settle closer to 3%, and interest rates will probably stay above 4% or more.
That’s because over the last few years there have been a series of structural changes in the economy which will provide tailwinds to prices. Supply-chain diversification, coupled with increasing trade protectionism in many countries, is constraining supply and reducing the disinflationary impact that global trade once provided.
Meanwhile, labour shortages are becoming a chronic constraint in Western economies. The increasing turn in Western politics against immigration as a recourse — even Canada, famously welcoming to newcomers, has begun to restrict it — will only exacerbate this effect. Labour shortages are thus driving up the bargaining power of labour, the result being rising real wages in many countries.
That helps sustain demand, which is a big part of the reason that economies are proving resilient amid higher interest rates. But this resilience will also keep interest rates from coming down as much as many had been hoping. We’re already seeing this effect in bond markets, where rising yields even amid falling inflation suggests that investors expect real rates to be higher in the future than they were in the past.
Assuming real wages stay positive, workers will continue adapting to higher interest rates, as they so far have mostly done. But while that’s good for economies, it will prevent interest rates from falling to the near-zero levels we once knew. Asset markets which had soared on the back of cheap credit are going to struggle going forward. Even if prices on property, stocks and private equity don’t fall in absolute terms, they probably will in real terms.
It amounts to a quiet revolution of sorts. For decades, income had been moving from workers to owners. That may now be reversing. And given that the owners in this day and age are often large pension funds, we may be in the midst of a substantial rebalancing of society, one whose significance we’ve yet to fully grasp.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).
jarapley
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SubscribeThe move from capital to labour based on demographics and financial repression is real and will be sustained (Peter Zeihan would say out to mid 2030s when kids of the millenials are available and sovereign debt levels are back to levels which avoid fiscal dominance).
To late boomers or folks thinking of early retirement I would say don’t unless you’ve run the numbers for a 5 % point real annual decline in income over a 10 year period (or are happy to bite substantially into capital).
Don’t touch sovereign bonds, get into a SIPP to try and avoid mandated sovereign bond holding, hold industrial equites in your own name (not a brokerage account), and don’t ignore commodities. I would also listen to some Russell Napier interviews (many good YouTube examples online – as a financial historian of repute he knows exactly what to expect)
I don’t always agree with John Rapley, but he’s right on this one.
Meanwhile, right now there’s price gouging going on in the fmcg space.
That’s not retiring – it’s moving into a new, demanding and tedious career as a money manager/ financial analyst. Take up growing your own food instead (see comments above).
BLACKSTONE BUYING UP US HOUSING. WHERE DO THEY GET THE MONEY. WHERE DO THEY GET IT ? i ask you. Its a mystery where it comes from ? But im off toopic. Housing isnt factored in to inflation. Anyway i own nothing and im happy, dont mind me. Off to worry about girlboss feminism or some such
The real economy of things and people is rebalancing supply side problems. The financial side is dealing with the problems of fiat money. Eventually all the debts of the state will either be inflated away with a total Wimar scale hyperinflation, or a debt jubilee will be proclaimed. All previous governments have chosen the hyperinflation resolution. A jubilee would be quicker and less painful, and less likely to lead to revolution. It appears that hyperinflation is less painful to elites and more painful to commoners. The reverse is likely true of a jubilee.
The US (and other western countries) hugely expanded the money supply, which by definition creates inflation, and made concerted efforts to “end fossil fuels.”
Those are the real reasons for historically high inflation.
Quite, that aspect of the downtown in the economy was entirely self inflicted
Printing money is more of a problem than food prices!
Inflation is always and everywhere a monetary phenomenon. Sadly the liquidity spiggots are still on – they’re just changing the name of each initiative to try and disguise the facts, although Yellen is being brazen with the issuance of short-term treasuries in terms of debt monetisation. Whilst the montary stimulus is inflationary, it continues to blow up asset prices. The reversion to the mean of this ever-expanding balloon could simply mean more and more years of financial repession. As Luc Gromen says if we need to get from 120% debt:gdp back to 50%, we can do 20% real inflation over 3.5 years or 5% over 14. It’s potentially going to be long and painful. Of course a war could allow the reset and new deal settlement. No options look great, but clearly some worse than others.
The food prices in Tesco most certainly have not fallen or plateaued. To the contrary, they have appear to have risen substantially since Christmas 2023 – as has the price of almost everything else. Everyone we know is complaining about the sharp price rises of foodstuffs in supermarkets.
It is not as bad as 2008/09 when our electricity bills increased overnight by c.60% while being told that the rate of inflation was near zero of even below! Some of us have lived long enough never to believe anything that governments (i.e. elected politicians and civil servants) tell us!
No idea whether you have any appetite or space for growing your own, but we’ve made it a 4 year mission to learn how to seed save, grow, and preserve food stuffs. One of the most unexpectedly rewarding things I’ve ever done. Either that or I need to get out more.
Of course ‘world events’ could disrupt this trend quite rapidly. Probably the big two being – China does something in S China sea re: Taiwan; conflict escalates directly with Iran. Heightened trade war US/China and/or major developments in Ukraine probably jostle for a third?
But that aside the Author’s final point worth really recognising – income has being moving from workers to owners for decades! Yep too right and fundamentally increasing inequality as it does so, as well as generating incentives to invest in Assets rather than businesses that generate goods and services and well paid employment. Author dead right to flag this, but may grossly underestimate how much this will be corrected by the inflation/interest rate levels now predicted. This still leaves ‘ratcheted in’ long term inequality, unfairness and disincentives, particularly inter-generational. It is the root cause of so many of our problems. Grasping that at least it may ‘slow’ as a trend not a great consolation. We need to tackle it much more fundamentally
Central Bankers have inflated Asset prices . We must not let them do it again.
IDK. I’m not seeing any of this in my neck of the woods. Fuel prices spiked very recently, only in part due to a rise in Canadian carbon taxes. Food prices are still rising noticeably.
One of the reasons that this hasn’t caused a huge fuss is that 60% of home owners have now paid off their mortgages. 30 years ago, an interest rate hike would have caused a political firestorm. Now neither increased borrowing rates or falling house prices bothers a mortgage-free owner occupier. In fact, having a reasonable saving rate is a net positive for them.
Now if we just had a sensible level of immigration which was balanced with our ability to build new homes, we could see house prices drop to the benefit of those first time buyers and renters.
I see the “blip” of interest rates down at the one or two percent between 2010 and 2020 as the “not normal” phenomena.
A quick search shows the average to 7.7% over 50 years in the UK.
4%/5% seems very reasonable to me going forward.
Agree. Pre 2008 my rule of thumb was a neutral policy was a 2-2.5% real short term rate i.e. if inflation expectations were 2% then neutral nominal interest rates should be 4-4.5% with bond yields a bit higher.
The artificially low or negative real rates of 2008-2022 led to inflation. It just emerged as house and other asset bubbles rather than goods inflation because of the disinflationary impact of globalisation.
I suspect central bankers will end up being much criticised for the 2008-22 period.
Spot on, and for the foreseeable future potentially something of a roller coaster (just been listening to a podcast about the potential for $200 barrel oil next year based on certain geo-political scenarios).
Long may it continue