Central banks continue to be obsessed with inflation.
Current monetary policy is like the behaviour of a reckless driver running at 200 miles per hour, looking at the rear-view mirror and thinking “we have not crashed yet, let’s accelerate”.
Central banks believe that there is no risk in current monetary policy based on two wrong ideas: 1) That there is no inflation, according to them, and 2) that benefits outstrip risks.
The idea that there is no inflation is untrue. There is plenty inflation in the goods and services that consumers really demand and use. Official CPI (consumer price index) is artificially kept low by oil, tourism and technology, disguising rises in healthcare, rent and housing, education, insurance and fresh food that are significantly higher than nominal wages and official CPI indicates. Furthermore, in countries with aggressive taxation of energy, the negative impact on CPI of oil and gas prices is not seen at all in consumers’ real electricity and gas bills.
A recent study by Alberto Cavallo shows how official inflation is not reflecting the changes in consumption patterns, and concludes that real inflation is more than double the official level in the Covid-19-era average basket and also, according to an article by James Mackintosh in the Wall Street Journal, prices are rising to up to three times the rate of official CPI for things people need in the pandemic, even if the overall inflation number remains subdued. Official statistics assume a basket that comes down due to replicable goods and services that we purchase from time to time. As such, technology, hospitality, and leisure prices fall, but things we acquire on a daily basis and that we cannot simply stop buying are rising much faster than nominal and real wages.
Central banks will often say that these price increases are not due to monetary policy, but market forces. However, it is precisely monetary policy what strains market forces by pushing rates lower and money supply higher. Monetary policy makes it harder for the least privileged to live day by day and increasingly difficult for the middle class to save and purchase assets that rise due to expansionary monetary policies, such as houses and bonds.
Inflation may not show up on news headlines, but consumers feel it. The general public has seen a constant increase in the price of education, healthcare, insurance and utility services in a period where central banks felt obliged to “combat deflation”… A deflationary risk that no consumer has seen, least of all the lower and middle classes.
It is not a coincidence that the European Central Bank constantly worries about low inflation while protests on the rising cost of living spread all around the Eurozone. Official inflation measures are simply not reflecting the difficulties and loss of purchasing power of salaries and savings of the middle class.
Therefore inflationary policies do create a double risk. First, a dramatic increase in inequality as the poor are left behind from the asset price increases and wealth effect but feel the rise in core goods and services more than anyone. Second, because it is untrue that salaries will increase alongside inflation. We have seen real wages stagnate due to poor productivity growth and overcapacity while unemployment rates were low, keeping wages significantly below the rise of essential services.
Central banks should also be concerned about the rising dependence of bond and equity markets on the next liquidity injection and rate cut. If I was the chairperson of a central bank I would be truly concerned if markets reacted aggressively on my announcements. It would be a worrying signal of co-dependence and risk of bubbles. When sovereign states with massive deficits and weakening finances have the lowest bond yields in history it is not a success of the central bank, it is a failure.
Inflation is not a social policy. It disproportionately benefits te first recipient of newly created money, government and asset-heavy sectors, and harms the purchasing power of salaries and savings of the low and middle class. “Expansionary” monetary policy is a massive transfer of wealth from savers to borrowers. Furthermore, these evident negative side effects are not solved by the so-called “quantitative easing for the people”. A bad monetary policy is not solved by a worse one. Injecting liquidity directly to finance government entitlement programs and spending is the recipe for stagnation and poverty. It is not a coincidence that those that have implemented the recommendations of Modern Monetary Policy wholeheartedly, Argentina, Turkey, Iran, Venezuela and others, have seen increases in poverty, weaker growth, worse real wages and destruction of the currency.
Believing that prices must rise at any cost because, if not, consumers may postpone their purchasing decisions is generally ridiculous in the vast majority of purchasing decisions. It is blatantly false in a pandemic crisis. The fact that prices are rising in a pandemic crisis is not a success it is a miserable failure and hurts every consumer that has seen revenues collapse by 10 or 20%.
Central banks need to start thinking about the negative consequences of the massive bond bubble they have created and the rising cost of living for the low and middle classes before it is too late. Many will say that it will never happen, but acting on that belief is exactly the same as the example I gave at the beginning of the article: “We haven´t crashed yet, let´s accelerate”. Reckless and dangerous.
Inflation is not a social policy. It is daylight robbery.
Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of Economics, Funds Society Forum in Miami, World Economic Forum, Forecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; “The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBC, World Economic Forum, Epoch Times, Mises Institute, Hedgeye, Zero Hedge, Focus Economics, Seeking Alpha, El Español, The Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).