You’ve probably seen the headlines: Russian drought spreads alarm in wheat markets; Bread prices set to spiral upwards; Interest rates need to go up to tame inflation.
There’s more than a hint of summer madness out there. The inflation ‘in-crowd’ have sunk their teeth into another disaster story.
Wildfires are devastating Russia’s crops. And as Putin blocks wheat exports, pundits inform us that inflation is about to run rampant as the price of bread soars.
The inflationists wag their fingers and tell us it’s going to get worse. Much worse. With VAT going up next year prices are going up, up, up.
Former MPC member Charles Goodhart reckons interest rates will have to rise to tame the inflationary beast.
This is crazy talk
You see Goodhart and his ilk are grappling with the wrong end of the stick. With one hand in a text book on 1970s inflation, they’re penning their thoughts on today’s economy with the other.
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I reckon that today something different is going on. In fact, if this jump in food prices does anything it will lead to a bout of deflation. Let me explain why.
Do you have a problem of too much cash?
Inflation is a concept that can fill tomes of economic text. I’m going to cut a very long story short and just say that inflation describes a world where too much money chases too few goods.
Is that your world?
Do you find that the stores just don’t have the necessities you need so if you see loo roll on the shelf, do you snap it up fearing it won’t be there next week? Are you getting rid of cash because you’ve got so much of it and its real value is falling by the day?
In short, do you feel the urge to splurge?
The answer to the above feels like a resounding NO to me. If anything, there’s an ‘urge to purge’. That is purge debt and cut down on spending because money is tight and we’ve been warned it’s going to get tighter.
From what I can see, we’re as likely to see a re-run of 70s inflation as we are to find Elvis plying ice-cream on Brighton pier.
I don’t think we’re in the seventies and I don’t see rates going up any time soon.
Why raising rates would be madness
As the price of essentials like fuel and food creep up, it means we’ve got less disposable income for everything else. So why on earth would general prices rise? How can the stores charge more when their customers have less money?
In fact, inflating fuel and food prices causes general deflation in other prices.
So raising rates to ‘tame inflation’ is just bonkers. It won’t make Putin lift wheat export bans any more than it’ll make the oil majors knock a few dollars off the price of the black stuff.
All it will do is drive us deeper into deflation by making loans more expensive for borrowers. As borrowers pay more interest, there’ll be even less disposable income around. Now, don’t tell anyone else this (as this is heretical stuff), but deflation suits me just fine.
Deflation is what’s going to allow the authorities to launch further rounds of QE. That’ll be the real money printing spell that could set off serious inflation. But that’s a story for another day; there’ll be loads of twists and turns before we get there.
For the moment, I’m sticking to my deflationary guns. I’m staying at least 25% in cash. Some industries and economies are better placed to cope with deflation and that’s where I’ve been hunting for opportunities.
• This article was first published in the free investment email
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