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Category: Glint Special Report

Glint Special Report: Inflation and rare honesty

There's good and less good news. First the good news. A central banker has come clean and delivered some rare honesty. He has acknowledged that creati...

10 November 2022

Gary Mead

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There’s good and less good news. First the good news. A central banker has come clean and delivered some rare honesty. He has acknowledged that creating lots of money and putting it into the financial system has contributed to inflation.

The Bank of England’s (BoE) chief economist, Huw Pill, told the House of Lords economic affairs committee this week that the BoE’s prolonging of its quantitative easing (QE) in the coronavirus pandemic may have contributed to the past year’s surge in inflation. The Bank’s QE programme saw it double its assets, mainly UK government bonds, to £895 billion (more than $1 trillion) by the end of 2021. QE is the process by which central banks buy government bonds, thus injecting bank reserves into the economy and increasing money supply, in turn lowering interest rates. Central banks do this to prevent a recession. But the more money there is sloshing around, and the cheaper that credit becomes, the greater the risk that inflation takes off.

That’s what has happened in the UK, the US, and other countries which have adopted QE policies. There is of course a time lag between increasing money supply and inflation creeping in – that lag is about 18 months. QE became a fashionable tool for central banks after the 2008-09 financial crash and again during the Covid-19 pandemic. The Covid-19 pandemic gripped the US and UK in 2020 and governments in the UK, the US, and elsewhere pumped trillions into the money supply to support individuals and businesses; the fear was economic recession. Yet the massive amounts of extra money pumped out have created inflation and, ironically, will produce economic recession – because central banks need to put interest rates higher and higher and those high interest rates create the conditions for recession – lower consumer spending, lower demand generally, and job losses.

UK inflation lags QE

Pill also said “we” (i.e. the UK) “are entering a recession”. That’s no news to those depending on food banks in the UK. The Trussell Trust, a charity that runs foodbanks across the UK, says that it served 40% more people between April and September this year than during the same period in 2021.

And then we have bad news, or at least not exactly good news. The latest consumer price index (CPI i.e. inflation) data came out from the US. According to this the CPI went up by an annualized 7.7% in October. This was the smallest increase since January. So a drop of 0.5% from September’s figure and 0.2% better than generally expected. US stock markets shot up on the news, the S&P500 going up by around 4%, the Nasdaq by 5.7%, and the US Dollar dropped by more than 1% against other currencies. The core CPI, excluding food and energy, rose by an annualized 6.3% against September’s 6.6%.

And now the less good news.

The stock markets leapt higher because they see the cooling inflation data as indicating that the Federal Reserve has some room to slow America’s interest rate rises. The expectation appears to be that the Fed’s benchmark interest rate will peak at around 4.8% in May 2023, against the former belief that 5% would be the high point. Some financial commentators have started to contemplate the possibility that the US will altogether avoid a recession. Americans have been cushioned against the worst ravages of the recent inflation by financial support from the government built up during the Covid-19 pandemic, but this is running low.

In any case it seems premature to celebrate the end of inflation. If the US inflation rate continues to reduce at this pace it will take until almost the end of 2024 for the Fed to return to its targeted interest rate of 2%/year. Americans have been relatively cushioned against rising prices by the government financial support gained during the pandemic, but their savings are running low. And, given international tensions – in particular the war in Ukraine, which could further disrupt supplies of energy and food and thus push up international prices – and the continuing competition for workers in the US, inflation may be hibernating.

Nevertheless, the weakening of the Dollar was good news for those who measure their gold holdings in Dollar terms – the price rose more than $45 Dollars yesterday.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

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