Ever receding targets

Most central banks around the world try to keep inflation locked up in its cage - once the beast escapes it's difficult to control. To that end they allow the beast a roaming leash and target an inflation rate of 2%/year - which means your fiat currency loses purchasing power by 2%/year. The beast broke free in the past couple of years, thanks to a rush of blood to the heads of its keepers. They decided to flood markets with newly created fiat money, loosening their grip on the beast, which is still wandering outside the compound, giving the occasional roar. The leash is proving difficult to tighten. Far from being behind bars, higher-than-sanctioned inflation threatens round two.

In the UK prices are either rising or set to rise. Water bills are now set to rise by an average 36% by 2030. In the 25 years since British water companies were privatized water prices have risen by 40% above inflation. Renting a property outside London is now 9% higher than a year ago, while in London the cost of a rented home is now 12% higher year-on-year. One mortgage broker has called the rises "astronomical and unsustainable". Inflation in the UK is now 2.6%/year. The Bank of England (BoE) target is 2%/year but given the price rises already pencilled in it's difficult to see how it will achieve that. Demands for more money keep coming on all fronts - the Ministry of Defence now says it needs to have 3.6% of gross domestic product (GDP) if it's going to be able to meet its obligations to Nato. The Labour government has said it will allow spending on welfare benefits to rise by 20% over the life of the current Parliament.

Inflation has not gone away in the UK, which explains the BoE's decision to keep interest rates unchanged, at 4.75%/year. High interest rates are the only weapon central banks have against inflation. The trouble is, high interest rates stifle economic activity. The UK's growth this year will be less than 2% - and has been almost non-existent for the past decade. As predicted, the UK has drifted into stagflation, the worst of all outcomes.

Is the US any better?

Superficially the US economic engine is purring. Growth this year will probably be above 2%. The beast flung a nasty surprise in November - inflation that month was 2.7%, marginally higher than October. Unlike the BoE the US equivalent - the Federal Reserve's Open Market Committee (FOMC) - decided this week to cut its benchmark interest rate range by a quarter of a per cent to 4.25-4.5%. But it also signaled a slower rate of further cuts next year, with some Fed officials expressing anxiety about the beast's return with the economic plans so far aired by the President-elect. The Fed's chairman, Jerome Powell, said inflation was moving "sideways".

As always it's the consumer who is behind the economy's steady growth. Consumer spending has survived the beast's recent ravages but matters could turn darker in 2025. The forthcoming President has promised tax cuts, which might increase the federal government's budget deficit, which in turn would force the Treasury to issue new bonds and thus drive up interest rates. His pledge to start a tariff fight and introduce mass deportations will only add to inflation.

Maverick economist Nouriel Roubini is famed for his gloomy prognostications. His view is that the list of Trump's policies will mean that "over time inflation will be higher, growth is going to be lower". Add in the possibility of large-scale deportations and the result could well be stagflation. Interest rates may be stubbornly higher for longer than many desire.

While Roubini may be excessively downbeat, the prospect is that the new President will set various cats among the pigeons. The tone has already been set by the killing off of a bipartisan Bill to keep the federal government funded. The stop-gap Bill would have kept the $6.75 trillion federal budget running until March, keeping defense, regulatory bodies, national parks and air travel safety all running smoothly. Leading Republican politicians followed Donald Trump's call to stand against the Bill because it would, he said, fund too many "giveaways" to the Democrats. It's a straw in the wind.

Sleeping not dead

Inflation is thus sleeping and not dead. Central bankers may want to tame the beast to 2%/year but this is an ever-receding target. Pretty soon they will acknowledge this and accept the target needs to be raised. Such an outcome will snuff out economic growth. The world is already teetering on the brink of stagflation thanks to wars and policy mismanagement. It may tip over into a fresh financial crisis as countries battle to fend off the worst effects of tariff wars.

This may not be in the spirit of the season's festivities, but comfort yourself that you have the best gift of all - gold! It's e-money, it's stagflation resistant, and it doesn't have any counter-party risk. Have a very merry break - we are taking a break too and will be back on January 10 2025.

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.