November 4, 2021 - 11:25am

On Wednesday the Fed announced that it would pull back on its $120bn bond buying programme. This is a clearly a response to market sentiment, which is increasingly unconvinced by the narrative that the current inflation being experienced across the world is transitory. Bond markets are pricing in faster Fed interest rate hikes by the day and the Fed, as is its wont, is signalling compliance with its tapering programme.

But what if everyone has it wrong — or, at least, partially wrong? A normal, or cyclical, inflation occurs when the economy is running too hot. But there is every chance that current inflation is not a normal cyclical event. Rather it is caused by supply chain malfunctions that are, according to the ISM manufacturing report on supplier deliveries, the worst we have seen since the mid-1970s. These supply chain issues are, in turn, a result of the enormous interventions we have made in our economies in the name of public health these last two years.

The lockdowns effectively interrupted the smooth flow of both the world and national economies. We failed to notice for a while because accumulated inventories kept the whole thing ticking over while we sat in our pyjamas on Zoom calls pretending that this was all perfectly normal. But now these interruptions are starting to bite — and the result is inflation.

What is more, in some countries at least, these problems are likely to get worse – perhaps far worse. This is because of the punitive vaccine mandates that are being brought into effect, both formally and informally. Until recently policymakers have — much to my amazement — been sanguine about the impact these would have on the economy. Just last week an economist friend in DC told me that he expected the mandates to impact no more than 1% of the labour force.

Yet when the New York mandate came online last Friday, almost 1 in 10 public sector workers failed to meet the criteria. Now basic services in New York City are shutting down. Noncompliance is likely to be higher in the private sector than in the Left-leaning public sector too and delivery companies are already considering turning down government contracts to avoid the mandate.

It is far from clear that a Fed rate hike can cure these ills. Conceivably it could stifle demand and give manufacturers and distributors breathing room to fix supply chains. But this seems like a long shot, and there is literally no chance that a rate hike can get workers who have refused vaccines back to work. If this turns out to be the case, then central banks risk stagflation on steroids. Recessions today tend to be worse than they were in the 1970s, and if inflation keeps spiralling, we could be facing down a hot mix of a 1970s style stagflation coupled with a 2008-09 recessionary event. Buckle up.

Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics