Inflationary Expectations


It seems that suddenly everybody is talking about inflation. Better late than never, I guess. In Australia, the inflation rate for the full year to 30 September 2021 was 3.1%. The September quarter price index rise was said to surprise economists and the bond market traders. Some Chief Executive Officers of large Australian companies have begone warning their consumers that price rises will be on-going. I know that in some industries, suppliers are giving notice of impending price rises closer to 10%. Producer prices are increasing rapidly and that will eventually feed its way into consumer prices. The Consumer Price Index is the favoured inflation measure of many people, but producer prices give a better lead indication.

Whenever inflation is said to be higher than expectations, you have to ask ‘whose expectations’. I find it hard to understand why this has come as a surprise. Last year in a series of posts about modern monetary theory, I explained how MMT would create inflation. MMT together with two other major forces, energy mismanagement and pandemic mismanagement, are responsible for the rapidly emerging inflation. These three major forces causing inflation have all been created by government error in all western countries. For the MMT description, see my posts from last year

Energy mismanagement has been obvious for years. Reliable and low cost sources of energy are being slowly squeezed out of existence by government direct impost and by subsidizing alternative sources of energy. The favoured alternatives are neither reliable or low cost. As a result, energy costs have been increasing and energy supplies have been constrained. Some high energy users were paid to stop production, ie not use power, during one of Australia’s energy crises in 2016. When energy costs increase, the price of everything increases.

The pandemic mismanagement saw businesses shut down or restricted. Workers were paid to stay at home. Many of them, it appears, have decided that they are quite happy to take more leisure time, even if it involves a cut in pay. Labour shortages are creating problems for businesses trying to get back to full production. Ports and transport hubs are operating at reduced capacity causing bottlenecks.

Overall, the cost of doing business has increased and the ability to get product to market has reduced and the money supply expansion continues. The supply side blockages are showing up in many areas. This has in part lead to prices increasing as those that can afford to pay more do so. The writing on the wall, in ink that has hardly dried, was spotted by many labour unions who have started demanding higher wages. There are threatened strikes for higher pay in some Australian sectors. The inflationary expectations of those that have to buy petrol and put food on the table are much more accurate than those of many central bankers and economists.