LAST week, we covered inflation and some of the drivers for it, mainly corporate greed.
‘History doesn’t repeat itself but it often rhymes’ is a phrase we can use when looking at inflation ‘stories’ and, in particular, who gets blamed for it. There is often a bogey man, but the accounts of the energy companies, banks, supermarkets and others don’t lie. They are making money out of your misery.
Inflation generally occurs when there are too many chasing not enough. Inflation is monitored in consumer prices and also in consumer services and goods. The real inflation has been in assets, and assets that the very wealthy have, and those assets have been much greater than inflation of consumer goods and services.
They occur, for example, when the central banks pump money into the banks to subsidise them. The wealthy’s vote matters: the large financial institutions, the investment banks, the high-net-worth individuals. These are the assets inflated by the central bank’s actions but not what the Fed or central banks per se talk about, because, well that’s not the narrative.
The monopolies who control prices, the sanctions on Russia. None of these are talked about and won’t be quelled by the nuclear impacts of using interest rate rises on mortgagees. Mortgagees just aren’t the influencers of that inflation. Remember there wasn’t a shortage of gas or oil in early 2022, but prices rose, because oil companies knew they could. That’s when they should have been slapped with windfall taxes to curb their behaviour, instead of allowing them to continue to do so.
Moreover, financial markets can manipulate prices as was done in 2008 (which this column covered in detail). Financial markets look at the ‘forward’ market and simply bid up prices. This is where you effectively have the monopoly. Many of the rules around this changed in 2003 to allow this to happen (after lobbying in the government they wanted) and when 2008 showed the impact, we were told it couldn’t happen again.
This needs to change, as that money flowing into influencing prices is colossal, but isn’t because of supply and demand (again as pointed out in this column in June 2008 before the collapse).
In the US, those monopoly lobbyists did everything they could to put their team onto the supreme court, where they would create the ultimate monopoly.
We now know that rising corporate profits were the largest contributor to Europe’s inflation over the last two years. The number is up.
We know companies have just increased prices because they said ‘there is inflation coming so we need to raise prices’. They blame too much money supply, ie quantitative easing (QE) and low interest rates, oh and ‘Russia’s war in Ukraine’. That narrative is everywhere, yet the former policies of QE and low rates have been around for a very long time with a benign inflationary background.
The latter matters more because of the sanctions placed on Russia which lowers the supply to the western countries who have applied the sanctions and of course the prices rise (too many chasing not enough).
Those who haven’t applied the sanctions have different inflation levels to the west i.e. China is just 0.2 per cent, South Korea 3.3 per cent, UAE 3.05 per cent, India 4.25 per cent, and Mexico 5.35 per cent.
What has also happened is the creation of inflationary ‘rentier’ economies. Have a read of the book ‘Private Island’ and see how the UK’s assets have been sold off. Forget Brexit and bogey men for now. These assets were sold off, so you now rent them, and pay through the nose for them. You rent money from a credit card and pay well over 20 per cent if you have debt. You rent your house with a mortgage (death grip). You rent your gas, your oil, your water.
This is where large parts of the economy went completely pear-shaped. When central banks ‘did’ their QE, it should have flowed into a productive economy, into products, services and infrastructure. Instead it was hoarded by the banks for the obvious benefit of them and the disadvantage to society (see ‘rentier’ above).
I can give many examples, but private water companies (often foreign owned) paid £1.4bn in dividends last year, and 20 per cent of your bills managed their debt and paid shareholder profits. They didn’t build new reservoirs and improve infrastructure to improve things and then lower costs. That is a rentier economy in full movie mode with no popcorn.
But all you will hear is “nurses and train drivers are driving up inflation with their wage demands”.
It’s simply not true.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a financial query, call Darren McKeever on 028 6863 2692, email firstname.lastname@example.org or visit www.wwfp.net