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Money & Markets: We are at the crest of the inflation mountain

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Everyone is talking about the effects of inflation, but it may well peak this year and it’s worth talking about what comes next – great opportunities in new technologies.

Engineers and technologists are not immune from the difficulties that inflation brings. Inflation is a hard-to-predict volatility and shaking is no good for anyone’s processes, let alone ones that rely on fine tuning, like JIT and Lean. To top that, most people in the West are simply too young to have practical experience of managing fast-escalating prices and all their consequences.

How is this novel inflationary period going to unfold?

To paraphrase, it’s easy to make predictions about the past. It remains quite easy to do that in writing because by the time many people read the prediction, the event and the prediction itself are in the past, and it then takes a lot of effort to tell the difference between a statement made before or after the event.

However, I will stake – granted within the framework of past performance being no guide to the future – that so far, I’ve predicted inflation well before the mainstream. As such, my decent track record is not driven by hindsight.

Everyone is now writing about inflation, but while everyone talks about the cost of living I find myself writing about future falling inflation and where that is heading.

Without caveat or prevarication, I believe we are at the crest of this inflation. We will summit this inflation mountain this year.
A key premise of inflation is that it is solely established by governments as it can only be started by an increase in money supply. Only governments can create money to the scale that overwhelms the supply of things with the supply of new money. The loss of money’s purchasing power is centrally controlled.

Hold that thought, because it is important for what is likely to happen next.

The pandemic caused a significant loss of GDP and that loss cannot be made up, but its effect can be washed out over time, which is the economic period we now find ourselves in.

There are two medium-term glitches that need to be got over. The most obvious, so called ‘supply chain’ issues, were in many cases created by destocking of the supply chain itself. Impaired companies had to liquidate stocks for cash, and that left an empty pipeline of goods stretching right back to commodity production.

The other almost invisible hiccup is the two-year period where no one was getting trained. That might sound trivial, but when that training is to drive lorries, fly planes, flip burgers, operate equipment in factories etc it becomes a huge problem: the lack of people to do key work, like getting you through an airport and on your way to a nice hot beach.

While the upskilling stopped, retiring continued and perhaps even accelerated, leaving an acute labour shortage. Depending on which figures you use, two years of retirement is around 10 per cent of the UK workforce, so if that’s not being replenished by training and such, you are bound to end up with a worker shortage.

You can clearly see this with the shortage of lorry drivers because there was (and is) a global shortage of lorry drivers, not just in rich, familiar countries. If you stop training lorry drivers for a year or two when the average age of lorry drivers is, like the UK’s, 53, you are going to have a big shortage. To fill that gap, you will have to pay more to pull drivers back from retirement and train new ones faster to close the supply gap.

Fortunately, ‘capitalism’ should fix this fast, and for smart governments it will lead to deregulation in critical areas, but in the meantime, it will create inflationary pressures. However, if new money is not created, you can’t have inflation, because while shipping spending goes up, that means less money has to be spent on other things. You then get recession, but you don’t get inflation. The government must create new money to create inflation, and it is going to.

The inflation you see now, though, was baked in months ago and is coming down the pipe, but the amount of new inflation to come is being baked in at lower levels, so that inflation levels will fall.

Inflation from the money printed since 2020 is already past, and that load being conveyed to prices is diminishing and will stabilise, then drop in the next year or two. At some point it will be back at three per cent.

The final thing to grasp is that none of this is an accident – it’s the only solution to the impact of the Covid pandemic, and regulators are totally in control of managing what has happened and are only in jeopardy for events that can’t easily be foreseen, like Russia’s horrible war in Ukraine.

The chance of economic meltdown on runaway financial crises is not on the cards from what has gone before.

The opportunities are in what has changed and what is being accelerated. That is where great opportunities lie for us.

Green hydrogen for the environment, mass offshore wind, undersea power cables from sunny deserts for western consumers. AI, robotics and crypto to bridge labour shortages and create efficiencies. These will be pushed to the fore by this current economic stress test. While ‘crisis’ doesn’t actually mean danger and opportunity in Chinese, this is where we find ourselves.

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