Accelerated Stagflation Now in Full Swing

Accelerated Stagflation Now in Full Swing

Evidence that accelerated stagflation is now manifesting across the world is now emerging and the resultant economic and social implications for ordinary citizens will be adverse.

As noted in the article, “The Biden Administration will Accelerate Stagflation[1]”, the stagflation[2] that commenced in 2020 was expected to accelerate in 2021 resulting from the economic policies of the Biden Administration.

These policies include:

• extraordinarily large (and debt-financed) fiscal packages relating to economic stimulus and infrastructure;
• anti-employment policies such as suspending key infrastructure projects and energy exploration; and
• re-joining the Paris Climate Accord.

These policies, coupled with extraordinary economic stimulus unleashed in 2020 with the onset of the COVID-19 pandemic, have created fears that inflation will blow out even further and potentially become uncontrollable, as recently noted by analysts at Deutsche Bank[3].

While advanced economies remain committed to current accommodative economic policies, emerging economies such as Russia and Brazil have already commenced tightening monetary policy by raising interest rates in an effort to bring inflationary pressures to heel.

Without similar efforts from advanced economies, continued rising inflation coupled with subdued economic growth and employment outcomes is the most likely outcome in the coming years.

Rising Inflation

Across the world, official measures have started to show quite aggressive rates of inflation in both consumer and producer prices which are well beyond the inflation targets set by respective central banks.

Some of these official inflation rates have caught some government and central bank officials off guard who have been forced to acknowledge that inflation has manifested higher than expectations.

However, some officials such as the Chairman of the US Federal Reserve Bank have claimed that current rates of inflation will be short-lived or ‘transitory’ given that some categories of rather steep price increases have resulted from economies being opened back up after harsh, prolonged lockdowns in 2020 (associated with the COVID-19 pandemic) with certain supply chains taking longer to reboot and return to normal relative to demand.

Other economists such as Shadow Stats economist John Williams claim for example that inflation in the United States, as measured by the consumer price index methodology of the 1980s, is both structural and approximately three times higher than current rates, i.e., 12 per cent per annum[4].

Examples of recent aggressive rates of inflation are outlined in Table 1.

Table 1: 2021 Examples of Aggressive Rates of Inflation

While these inflationary outcomes may be partly explained by:

• rising commodity prices (including agriculture, energy (e.g., oil), materials (e.g., timber), minerals and metals (e.g., copper)); and
• disrupted supply chains resulting from supply bottlenecks, elevated shipping rates as well as critical component shortages such as semi‑conductors

Austrian and monetarist economists suggest that prices within these components are ultimately driven by the expansion in the money supply of fiat currencies.

Importantly, such inflationary forces are already predicted to erode the living standards of ordinary citizens. For example, the Resolution Foundation predicts that inflation in the United Kingdom is likely to rise to 4% resulting in household budgets eroding by 700 British Pounds in annual real disposable income[15].

Sluggish Economic Growth and Employment Outcomes

Importantly the other pre-requisite of stagflation is sluggish economic and employment growth. In the United States, while the Biden Administration has overseen an economic normalisation with the opening up of the US economy from the severe lockdown policies of 2020, the economic recovery has not been particularly robust.

For example, the University of Michigan’s Consumer Sentiment Index has seen a significant drop in recent months including when gauging American consumer sentiment on economic conditions[16].

Also, while US employment has continued to grow within expectations, the US labour participation rate is still well below the 63.4% level recorded in January 2020 (i.e., prior to the COVID-19 pandemic), given its recent reading of 61.6% in May 2021. Moreover, manufacturing orders remain sluggish (particularly those for consumer durable goods) and as noted by American economist Peter Schiff[17], manufacturing jobs declined on a net basis in the months of April and May 2021 by 9,000 jobs.

Beyond the United States, sluggish economic growth and employment outcomes are likely to manifest in the coming months resulting from continued economic disruptions due to the ongoing COVID-19 pandemic.

Determining how the global economy will ultimately perform is still an evolving picture, however, tighter monetary policy in emerging economies such as Russia and Brazil may also adversely impact economic growth and employment outcomes in those respective economies.

Stagflation in Australia

Importantly, in Australia, the forces of stagflation continue to manifest both in the context of cost‑push inflationary pressure and sluggish employment outcomes.

On the inflationary front, the same cost-push inflationary pressures now impacting the world are also impacting the Australian economy. Moreover, surging prices especially related to real estate and land in terms of capital values, as well as rents, mean that cost of living pressures will continue to exacerbate.

On the employment front, different measurement methodologies provide diametrically opposing assessments.

For example, the Australian Bureau of Statistics (ABS) released economic data in the past week showing the official unemployment rate falling to 5.1% and the underemployment rate falling to 7.4% while the labour force participation rate rose by 0.3% to 66.2%.

This is in stark contrast to the private sector statistical organisation Roy Morgan Research which reported that in May 2021, unemployment was 10.3%, underemployment was 8.6% and the labour force participation rate was 69.7%[18].

Irrespective of the statistical methodology employed, evidence is emerging that many of the jobs which have been created and filled in recent months have been in regional Australia given the estimated approximately 300,000 non‑resident workers who are no longer working in Australia relative to the pre-COVID-19 period.

This phenomenon has led to an abnormal divergence in the unemployment rate of Australian capital cities and regional areas, shown in Diagram 1, where unemployment in regional areas is lower than that of capital cities. Moreover, as noted recently by the Reserve Bank of Australia (RBA) Governor, the unemployment rate in regional Australia is at its lowest level in the past decade[19].

Diagram 1: Australian Unemployment Rate – Capital Cities vs Regional Areas

Importantly, many of the jobs created in the past 12 months have been either of a part time or casual nature. As noted by the ABS, in the 12 months to May 2021, 565,900 part-time jobs were created as opposed to only 421,300 full-time jobs meaning that the part-time share of the overall employment pool rose by 2.1% over the same 12-month period to 31.7%.

Thus, given these employment dynamics, many Australians on a net cash flow basis have been, or currently are, unable to find adequate levels of secure work that allows them to generate a sufficient level of household disposable income.

It is for this reason why financial stress (which includes mortgage stress[20] and rental stress[21]) is not only at record levels in Australia, but also continues to rise. For example, according to Australian data house, Digital Finance Analytics (DFA), the level of mortgage stress and rental stress reached 41.1% and 38.2% in May 2021 respectively.

Within these record levels of stress, rental stress, according to DFA, jumped significantly in May 2021 by 168,017 households.

Thus, despite relatively low levels of officially measured unemployment, weak economic conditions coupled with cost-push inflationary pressures are manifesting in lower to middle class Australians being financially squeezed and thus experiencing lower living standards. Historically speaking, these forces constitute the underlying dynamics that define stagflation.

Given the current macroeconomic policy course which the Morrison Government and the RBA have set for Australia, this phenomenon is expected to continue.

Economic Policy Makers Are Trapped

Unfortunately for billions across the world there is little that economic policymakers can do to resolve the stagflationary forces that are currently raging across the world and are likely to intensify in the years ahead.

In many countries across the world, economic conditions have not returned to pre-pandemic levels and thus are said to still require extraordinary accommodative fiscal and monetary policy settings.

In some countries, such as the United States, expectations have been recently raised that official interest rates may be raised commencing in 2023, with tapering of quantitative easing to start sooner.

Even if economic circumstances present themselves that require a withdrawal of economic stimulus either due to runaway inflation manifesting, and/or full employment coupled with robust wages growth occurring, policy makers will have little flexibility given global debt dynamics.

The underlying fundamental policy challenge facing most nations and the world is the current global debt bubble that in both nominal and proportional terms is the largest in human history.

Any excessive tightening of macroeconomic policy settings (especially fiscal and monetary policy) would lead to the greatest deflationary depression in the history of economics, a complete antithesis of the public policy desires of governments and central banks the world over.

Thus, given that policy makers are stuck in the current policy vortex, ongoing stagflationary forces, resulting from the COVID-19 pandemic and its immediate aftermath, will likely ensue for the foreseeable future.

The only prospect to preventing stagflation from morphing into hyperinflation is for courageous policy makers to dramatically lift interest rates in similar fashion to that of former US Federal Reserve Chairman Paul Volcker in the early 1980s[22].

To date, no obvious candidate from central bank officials has emerged who can fit Volcker’s shoes.

Conclusion

Stagflation is now manifesting itself across the world. Officials are only now being forced to admit this is the case, given that stagflation is accelerating largely due to the policies of the Biden Administration.

Stagflation is not only limited to the United States but is also playing out in both advanced and emerging economies alike.

These forces have yet to fully manifest given that the COVID-19 pandemic continues to adversely disrupt economic activity (e.g. supply chains) across the world. Such disruption will only cease when either the virus dissipates or when effective medical treatments or responses are developed, accepted and deployed.

To date, many economies around the world have yet to return back to their pre-pandemic levels of economic activity, despite record levels of economic stimulus over the past 15 months.

While advanced economies have no intention to withdraw economic stimulus in the coming 18‑24 months, emerging economies such as Russia and Brazil have been already forced to aggressively raise official interest rates in their battle to subdue inflation.

While policy makers will attempt to give the appearance that their intention is to implement economic normalisation, there is little prospect of this occurring given that any real attempt to normalise fiscal, monetary and bank prudential policy will ultimately threaten the stability of the global financial system and the global debt bubble.

Thus, for the foreseeable future, accelerated stagflation will continue to manifest which will pose both challenges as well as opportunities for global investors.

In such an environment, holding precious metals such as physical gold and silver bullion is, historically, the only reliable time-proven mechanism that can provide investors protection against the erosion of their purchasing power.

Thus, despite recent downward pressure on the price of gold and silver, the current and expected future macroeconomic environment supports greater investment demand for physical gold and silver bullion which, despite price manipulation in these markets, will likely lead to higher prices in fiat currency terms.

John Adams is the Chief Economist for As Good As Gold Australia

[1]https://www.adamseconomics.com/post/the-biden-administration-will-accelerate-stagflation

[2] Stagflation is defined as the combination of low economic growth, relatively high unemployment/underemployment and rising prices

[3] https://www.news.com.au/finance/economy/world-economy/deutsche-bank-warns-the-global-economy-is-sitting-on-a-time-bomb/news-story/37aec2fecdc2f48eeaf927aec3a0aa00

[4]See http://www.shadowstats.com/alternate_data/inflation-charts and the following interview https://www.youtube.com/watch?v=CEs8SCN7L5g&t=1645s

[5]https://www.theguardian.com/business/2021/jun/10/us-inflation-highest-rate-stocks-consumer-price-index

[6]https://www.cnbc.com/2021/06/15/retail-sales-producer-price-index-may-2021.html

[7]https://www.reuters.com/world/uk/uk-inflation-rises-21-may-2021-06-16/

[8]https://www.cbc.ca/news/business/inflation-may-canada-1.6067484

[9]https://www.ft.com/content/e2154bc3-e881-442a-b5aa-37be7cbc24a9

[10]https://www.reuters.com/business/skoreas-inflation-hits-9-year-high-commodity-prices-jump-2021-06-01/

[11] https://www.fxstreet.com/analysis/mid-afternoon-market-update-dow-tumbles-over-400-points-cai-international-shares-spike-higher-202106182009

[12] https://www.cnbc.com/2021/06/09/chinas-producer-prices-surge-the-most-since-2008-cut-into-profits.html

[13]https://www.ft.com/content/c13da04f-b765-4e58-8435-d9cc27d491dc

[14] https://www.ft.com/content/8b5f4b4d-cbf8-4269-af2c-c94063197bbb

[15] https://www.theguardian.com/business/2021/jun/20/uk-inflation-could-soar-above-4-this-year-thinktank-warns

[16] See https://www.reuters.com/business/us-consumer-sentiment-declined-may-2021-05-28/ and https://www.reuters.com/world/us/us-consumer-sentiment-rebounds-early-june-survey-2021-06-11/

[17]https://www.youtube.com/watch?v=e8ZedMCNgRM

[18] See the different methodologies between Roy Morgan and the ABS explained here: http://www.roymorgan.com/morganpoll/unemployment/unemployment-methodology

[19]https://www.rba.gov.au/speeches/2021/sp-gov-2021-06-17.html

[20] Mortgage stress is defined as households who are renting that are unable to generate sufficient levels of cash flow which would allow the payment of all household expenses including mortgage repayments.

[21] Rental stress is defined as households who are renting that are unable to generate sufficient levels of cash flow which would allow the payment of all household expenses including rental expenses.

[22] https://www.pbs.org/newshour/economy/what-led-to-the-high-interest