How chasing the sugar rush of monetary infusions gave us high inflation

The world’s top leaders are responsible for this biggest misstep in our recent economic history
The authorities blame rising food and oil prices or war – when the real cause is poor monetary and fiscal policymaking

Richard Harris

Published: 4:30pm, 1 Jun 2023

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On November 30, 2021, US Federal Reserve chairman Jerome Powell said it was time to stop describing inflation as “transitory”. Six months later, Treasury Secretary Janet Yellen admitted she “didn’t, at the time, fully understand” how severe inflation would be. Last month, Bank of England governor Andrew Bailey said “there are very big lessons about how we operate monetary policy in the face of very big shocks”.

These are embarrassing admissions by our economic leaders to the blindingly obvious.

High inflation is the dominant economic narrative of 2023. It exposes the biggest misstep in recent economic history, which was the continuous injection of large amounts of money by policymakers into the world economy following the global financial crisis of 2008.

This was done to resist the onset of recession, but slowdowns are part of a successful economic system, which eventually runs ahead of itself and then needs time to catch up, unclog, reset and renew. Economies are living and dynamic, they do not stay static and cannot be managed as if they do – an assumption that consigned the Soviet Union to history.

Indeed, today’s megalithic technology companies demonstrate that a disorganised and messy economy provides opportunities for renewal – as many emerged from a garage or a college dorm.

Of course, recessions bring great hardship and, in any economy, this leads to a discontent with leadership among the general population. Those with eager hands on the levers of power are therefore happy to sustain the sugar rush by printing money under the guise of avoiding the “temporary” recessions caused by events such as the Covid-19 pandemic or a war – when such recessions are the norm, not the exception.

There has been no expression of regret or shame from experts who admit to having wrongly forecast inflation levels. Even teenage economic scribblers know that inflation is “too much money chasing too few goods”. It is often joked that economists make policy by looking in the rear-view mirror, but the targeting of inflation levels rather than worrying about money supply, was an example of putting the cart before the horse.

Schoolboy errors by these grizzled central bankers resulted from oversheltered groupthink, mutual self-satisfaction, political pressure or an emphasis of hope over reality. They convinced themselves, despite their experience, that printing money was not going to lead to a significant increase in prices. Their forecasters failed to realise that modelling economies on periods without shocks fails to pick up extreme shocks that periodically emerge.

Yet, surely institutional memory does not disappear that quickly – even I remember decades of double-digit inflation. This column has been forecasting heightened inflation since 2020. It was not hard. We are back to normal.

Inflation as a concept is well understood by economists. There is no shortage of nomenclature, such as stagflation and hyperinflation or galloping, walking, headline and creeping inflation, or deflation, reflation, disinflation, falling inflation or built-in inflation. The latest buzzword is “greedflation” – where companies take advantage of the inflation narrative to put up prices and fatten profits.

A 2.4kg chicken next to 14.6 million bolívars, its price – equivalent to US$2.22 – at a mini-market in Caracas, Venezuela, on August 16, 2018. In 2021, Venezuela cut six zeros from the bolivar in response to hyperinflation, its second monetary overhaul in three years. Today, 14.6 million bolívars is still only worth US$5.58. Photo: Reuters

The cause and effects of inflationary economic policy are evident in the monetary destruction of the currencies of Argentina, Turkey, Venezuela and Zimbabwe, which are forced to trade in hard, convertible currencies. The most damaging result is in the soaring interest rates that create a vicious circle of further inflation.

Government-derived inflation rates are used to index a wide range of metrics, from wage rises and gross domestic product measurements to capital gains tax calculations. It is oh-so tempting to be economical with the truth. Inflation indices vary – from retail price indices to consumer price indices, from definitions such as factory gate and core, to fringe and with or without oil, housing or food. Such indices can and are manipulated by adding or dropping various components and promoting them as “headline”.

This can only go on for so long. The general population doesn’t care if the official inflation rate is 2.5 per cent if their lifestyle is inhibited by having to spend 20 per cent more on food.

06:10

Underprivileged class bearing the brunt of Hong Kong’s rising inflation

Inflation supports the skilled and the already rich with rising wages, higher nominal profits and better investment returns. Companies save costs by getting rid of labour through mechanisation, adding stress to already pressurised government budgets. Policymakers remove moral hazard by subsidising inflated costs.

US President Joe Biden’s Inflation Reduction Act has the further unintended consequence of seeking to beggar its trading partners – which will lead to higher prices in the US. Governments often treat the symptoms by enacting price caps that empty supermarket shelves – again harking back to the Soviet Union. The authorities blame asynchronously rising food and oil prices or war, when the real cause is poor monetary and fiscal policymaking.

The only person in authority to come clean is British finance minister Jeremy Hunt, who said last week that he would be “comfortable” if further interest rate rises precipitated a recession, because “inflation is a source of instability”. Hunt showed great honesty, despite it being politically unhelpful. Across London, the fact that the Bank of England, well endowed with economics PhDs, still has “very big lessons to learn” about inflation indicates that the future of economic mismanagement is secure.

Richard Harris is chief executive of Port Shelter Investment and is a veteran investment manager, banker, writer and broadcaster, and financial expert witness