So, prices are up and they look stickier than we want. The ‘cost-of-living-crisis’ is the new watchword. But hang on, is this a crisis – suggesting it is temporary – or is it the new normal? And what is to blame?
High prices started with a supply-demand issue on the primary engine that drives every economy: oil and more specifically diesel. It then trickled down into the everyday slowly but with force and because our globalised economy is heavily dependent on transporting goods and people around the globe like confetti, higher oil prices automatically make everything we use and eat daily more expensive.
Can we blame the government? Governments are rarely looking beyond the immediate election horizon and hence could be forgiven to fail to understand that the post-pandemic, pent-up demand would create economic growth that was mismatched with the availability of fuel, sending oil and gas prices to new highs, creating inflation. And logically people blame their governments for the higher prices, but governments in turn are quick to point the finger elsewhere: to the pandemic, the ‘greedy’ oil companies, the war, quantitative easing, the Central Banks….
But who/what is to be blamed, if not the government?
First off, the pandemic. There is a clear inflationary link between an economy restarting from a total standstill to extraordinary activity. Besides, during the pandemic governments spent colossal amounts of money on all kinds of stimulus and put cash in people’s pockets for staying at home. Household savings during the pandemic therefore were higher than at any time in recent history and a lot of that saved up cash found its way into the economy when restrictions were lifted, creating an economic boom. One could argue that, had governments been less draconic in shutting down entire economies, inflation might have been lower than it is now. So, it was not only the pandemic that caused inflation, but also the government’s handling of it.
Second, the oil companies. It would be easy to lay the blame at the door of the greedy oil companies. But oil companies are not greedy perse. In the years preceding the pandemic oil companies were asked/required to transition to greener and cleaner energy and less investment was put into traditional exploration sites. Oil exploration was effectively shut down early in the pandemic and oil was a commodity nobody wanted. Oil companies sustained incredible losses during 2020 (but no one cared) and then – when demand roared back to life, the production capacity could not match it and oil prices rose to levels we had no seen before. The war in Ukraine and the sanctions against Russia and its oil & gas have added lot further pressure to prices. But are oil companies to blame for inflation? Not really.
Third, quantitative easing and the Central Banks pursuing it, could this be a cause? The general press does not talk much about how quantitative easing could be a key culprit of today’s inflation, maybe because it is easier to look for more obvious scapegoats. But this mechanism of monetary policy has served as an artificial way of keeping interest rates and prices low and inflation in check. Quantitative easing was accepted as a necessary, emergency, medicine after the 2008 financial crisis and it did its job for that period. But why keep it going for so long? Why were zero rates so addictive? Why keep pumping money into the system, making it worthless, eliminating the idea of saving and urging spending instead? And we did indeed spend, spend, spend. In economic theory, greater demand should lead to higher prices, but our decade long sponsored spending spree (with a big Thank You from Amazon) did not, officially at least, thanks to the Central Banks and their continued QE policy.
Last, The Central Banks. Should they have known the prolonged QE was unsustainable? Were Central Banks too ‘easy’, too complacent? Were they too pleased with themselves of not exceeding the official 2% inflation target? Did they not pay enough attention?
QE has turned economies into consumer dependent economies, and it has obliterated our savings. So, part of the blame should certainly go to the Central Banks, as pre-pandemic they relied too heavily on an artificial economic measure and then, following the pandemic, the great post-pandemic demand and the Ukrainian war, the cruise-control 2% inflation came undone. At breakneck speed, catching many a central banker asleep at the wheel.
As often, the blame for today’s inflation can be attributed to various causes, most of these indicate a more permanent setting of prices. That is, if we accept that prices and inflation were artificially low until now and that the truth probably lies in the middle and that the policy of zero rates must be confined to the past. Let’s hope Powell, La Garde and Bailey are listening.
References & links:
https://www.bankofengland.co.uk/bank-overground/2020/how-has-covid-affected-household-savings
https://www.ft.com/content/965b8ffa-4b1a-46c7-9321-6e7c39f2e3b6
Other articles that may be of interest
Explore others in this topic or return to the index.
