Glint Special Report: Inflation slows, slowly

Inflation in the US and the UK is slowing – but slower than a weak snail.

In the US, the consumer price inflation rate in November was 7.1%, down from 7.7% the previous month. In the UK, the rate was an annualized 10.7 last month compared to 11.1% in October. The core inflation rate (which excludes food and energy) in the US was up 6% from a year earlier; in the UK the core reading (which excludes not just food and energy but also alcohol and tobacco) was 6.3% against 6.5% in October.

Elsewhere inflation mostly seems to be inching down equally slowly; Eurostat expects November inflation in the Eurozone to be 10%, against 10.6% the month before; in the Baltic States, inflation is easing but remains above 20%; in Russia it fell to 12% versus 12.6% in October. Spain’s November figure was 6.8%, 0.5% less than October. Sweden provides an exception – there inflation was 11.5% last month versus 10.9% in October.

Should we give three cheers at the signs of slowing inflation, or just two because it’s taking its own sweet time getting back to a more ‘normal’ 2%/year that is ‘targeted’ by many central banks? Inflation, said one renowned economist, “is one form of taxation that can be imposed without legislation”.

Inflation steals wealth from our pockets. It’s difficult to feel gratitude that our fiat currency is not losing more than 11% or 7.7% of its purchasing power annually but ‘only’ 10.7% or 7.1%.

Moreover not everyone agrees with the US official figures – the inflation that “households are actually experiencing is raging and well in excess of reported gov’t statistics” tweeted Bill Ackman, CEO of Pershing Square, the hedge fund. In the UK the prices of food and non-alcoholic drinks in November was an annualized 16.5%, the highest since 1977, and slightly higher than October.

So the great inflation crisis of 2022 is ending, yes?

No one wants to be a party-pooper but it’s too soon to get out the party hats. 2022 is almost over, so this year’s great inflation crisis will certainly soon be done with.

But what will 2023 bring? Another black swan event, like Russia’s invasion of Ukraine?

Even if that doesn’t happen, another crude oil price spike seems on the cards, according to the International Energy Agency (IEA). Thanks to sanctions squeezing Russian supplies, and crude oil consumption growth growing by an estimated 1.7 million barrels per day in 2023, an inflationary rally in oil prices back to $100/barrel seems likely. “The full impact of embargoes on Russian crude and product supplies remains to be seen… As we move through the winter months and toward a tighter oil balance in the second quarter, another price rally cannot be ruled out” said the IEA. Falling Russian supply (as wells are shuttered as a result of sanctions) and partial embargoes on Russian oil imports will push up international crude oil prices. Commodity food prices in November were, notably, barely changed from the previous month, according to the UN Food and Agriculture Organization’s (FAO) food price index. A worsening of the Russia-Ukraine war could easily put fresh heat under cereals and edible oil prices.

The slowing inflation gave scope for the US central bank, the Federal Reserve, to ease off the interest rate pedal – just a little. Instead of putting the federal funds rate up by 0.75% (as it has done on four successive previous occasions) the Federal Open Market Committee (FOMC), which is responsible for interest rates, has raised rates by 0.5%, giving a range of 4.25% to 4.5%. The chairman of the Federal Reserve, Jay Powell, warned of more pain to come: “it will take substantially more evidence to give confidence that inflation is on a sustained downward path” he said. Consensus is that the federal funds rate by the end of 2023 will be above 5%, US unemployment will hit 4.6%, and economic growth will only be 0.5%. The Fed aims to achieve inflation of 2% but is that achievable? Or will 4% become the ‘new’ 2%?

The Bank of England (BoE) has the same 2% ‘target’ for inflation, which seems an equally distant prospect; the UK’s current inflation is five times greater than that. The BoE has now put up interest rates by 0.5%, bringing the rate to 3.5%. What is the Bank trying to do? This higher rate will do nothing to stifle such high inflation, indeed by pushing up mortgage rates it will worsen the cost of living crisis; it will cut people’s ability to spend but that will take months to make itself felt.

Understandably many British workers, especially in the public sector, have decided to go on strike. Standards of living in the UK are predicted by the Office for Budget Responsibility (OBR) to fall over the next two years by the largest amount in six decades. Nurses, ambulance crews, border officials, railway workers are all holding strike days, mostly pressing for wage increases in line with inflation, although nurses are demanding a 19% increase.

The government is adamant that such wage increases are unaffordable and would simply stoke inflation; but the cost of living crisis is hitting millions of people hard. Private sector wage rises have gone up by almost 7% on average in the past year, while public sector increases have been just 2.7%.

Some kind of compromise will need to be reached. But, as with many compromises, it will be a struggle to achieve and may leave both sides disgruntled. Uppermost in the mid of the Conservative government is that last time the UK experienced a ‘winter of discontent’, in 1978-79; the Labour government of the time was ejected a few months later and spent 18 years in opposition.