Governments cannot blame inflation on energy anymore

At the end of February 2023, the price of oil (WTI and Brent), Henry Hub and ICE natural gas, aluminum, copper, steel, corn, wheat, and the Baltic Dry Index are below the February 2022 levels.

Governments cannot blame inflation on energy anymore

The Supply Chain Index and the global supply-demand balance, published by Morgan Stanley, have declined to September 2022 levels. However, the latest inflation readings are hugely concerning.

Considering the previously mentioned prices of commodities and freight, if inflation were a “cost-push” phenomenon, it would have collapsed to 2% levels already. However, both headline and core inflation measures, from the Consumer Price Index (CPI) to Personal Consumer Expenditure Prices (PCE) show extremely elevated levels and rising core inflationary pressures.

We have mentioned numerous times that there is no such thing as “cost-push” inflation. It is only more units of currency going toward relatively scarce goods and services.

The monetary aspect of inflation has been proven on the way up and in the commodity correction. The Federal Reserve’s rate hikes have deflated the price of commodities despite rising geopolitical tensions, supply challenges, and robust demand growth. Rate hikes make it more expensive to store, take long positions, and finance margin calls. Powell offset the entire supply-demand tightness impact on prices.

Governments cannot blame inflation on Putin’s war or the so-called “supply chain disruptions” anymore. Printing money above demand is the only thing that makes prices rise in unison. If a price rises due to an exogenous reason but the quantity of currency remains equal, all other prices do not rise. A PCE index of 4.5% in January 2023 with all the main commodities below the January 2022 level shows how high inflationary pressures are.

Inflation is accumulated, and the narrative is trying to convince us that bringing down inflation from 8% to 5% in 2024 will be a success. No. It will be a massive destruction of more than 20% of purchasing power of citizens from inflation in the period.

However, rate hikes are not enough. Broad-based money growth needs to come down rapidly. So far, in the United States, broad money growth is flat and has declined to more reasonable levels in December 2022. However, the latest ECB reading of broad money growth in the euro area points to a 4.1% increase, which is very high compared to modest gross domestic product (GDP) growth and certainly very high compared with the estimates for 2023.

Broad money growth was too aggressive in 2022 and it may take some time to ease the inflationary pressures to a level that does not make citizens even poorer.   

Two recent papers published by the Bank of International Settlements remind us that money growth was the main culprit for the inflation surge. Borio, Hoffmann and Zakrajzek conclude that “a link can also be seen in the recent possible transition from a low- to a high-inflation regime. An upsurge in money growth preceded the inflation flare-up, and countries with stronger money growth saw markedly higher inflation. Looking at money growth would have helped to improve post-pandemic inflation forecasts, suggesting that its information value may have been neglected” (Does money growth help explain the recent inflation surge?). Reis explains that “Inflation rose because central banks allowed it to rise. Rather than highlighting isolated mistakes in judgment, this paper points instead to underlying forces that created a tolerance for inflation that persisted even after the deviation from target became large” (The burst of high inflation in 2021–22: how and why did we get here?)

The supply chain and Ukraine war excuse has vanished, but inflation remains too high. Many market participants want rate cuts and money supply growth to see higher markets, with multiple and valuation expansion. However, rate cuts are very unlikely in this scenario and central banks know they have caused a problem that will take more time than expected to correct.

Governments cannot expect inflation to correct when public spending is rising, which means higher consumption of new monetary units via deficit and debt.

Citizens are suffering these inflationary pressures via weakening real wage growth added to much higher cost of living as the prices of non-replaceable goods and services—education, healthcare, rents, and essential purchases—are rising much faster than the headline CPI suggests.

We are all poorer, and the headline is slightly lower. CPI does not mean lower prices, just a slower pace of destruction of the purchasing power of currencies.

Someone will invent another excuse to blame inflation on anything except the only thing that causes prices to rise at the same time: printing currency well above demand.

About Daniel Lacalle

Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap". Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.

5 thoughts on “Governments cannot blame inflation on energy anymore

  1. “Someone will invent another excuse to blame inflation on anything except the only thing that causes prices to rise at the same time: printing currency well above demand.”

    You are just deliberately confusing the issue. Sure, printing currency above demand makes prices rise. But what makes the average person feel squeezed is if their wages don’t buy as much as before. This can happen when wages grow less than average prices, when wages fall and average prices rise, or in any other combination that results in wages buying less loafs of bread (to put an example good) than they did before.

    And what the average person wants to know isn’t usually: “How do central banks work?” But: “What is happening to real goods, real services and trade that is making my wages buy less loafs of bread than they did before?”

    But I get it, finance people would hate to lose their jobs.

    1. I’m sorry I don’t get it. You suggest that a massive salary increase will solve the loss of buying power?

      The only way we will be able to control Inflation is accepting that, that loss of buying power, is the beginning. It will get much worse. It is accumulative.

      Printing money, has a price.
      And debt, is money.

  2. We have fewer people working now than a few years ago, and thus less stuff is being produced, while at the same time we are consuming about the same amount. So where did the working folks go? For production in the USA, this is due to the peak of the Baby Boom reaching the “street” retirement age (i.e., not 65 or 67, but whatever, 59?) and with fewer folks aging into the labor pool. For production globally, this is China providing USA consumers with less stuff – be it from tariffs implemented by Trump and continued by Biden, China continuing to be a COVID basket case, or a reckoning by American corporations that it needs to retreat a bit from the Reaganite neoconservative globalization meme and build up a better supply chain, something that Biden has been effective at pushing through against the nearly unanimous, hypocritcal Republican opposition.

    This dearth of labor has caused the basic market wage for Americans to shoot up – something that EVERYONE used to think was wonderful, but something that does push up inflation. Oh BTW, for folks who have wages & benefits (like Social Security) that track inflation, such inflation is not an important issue; inflation only hurts investors that are long in the currency (I’m not considering some Working Class member who has $1K in the bank as being that much “long”) and zombie businesses that can only stay in business by having super-low interest rates.

    All that said, there was a bit of a “printing money” input from the COVID emergency that left the great mass of folks as not being as debt-constrained as they usually are, but that input is working itself out. A stronger input is that the job market for the lower end is as robust as it was in the latter Clinton era, and that is allowing folks to be able to bid up the prices on stuff.

    And in any case, history has shown that Republicans print far more money than Democrats (yes, the Dems might spend a little more, but they raise the revenue to pay for it), so the author’s take on it is misplaced. Also, the only remedy to get inflation “under control” is to get wages “under control”, and the only way to do that is to create a labor glut, something that could only be done by large-scale immigration (especially illegal, so as to keep wages even lower) like the way Reagan-Bush-Bush had done – but I thought that high wages are a good thing. OOPS!

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