When investors become aware of a potential risk the probability of the risk ensuing reduces as investors take action to mitigate against the risk, but not with the risk of inflation. The more investors focus on inflation as a risk the greater the inflationary risk becomes owing to inflation expectations, which becomes a self-fulfilling mechanism for driving inflation higher.

Employees and their union’s fearing the effects of inflation demand higher increases, self-employed service providers push up their charges and companies adjust prices upwards to protect their profits from the same inflationary fears as that of their employees. You have a virtuous cycle of inflation expectations fuelling inflationary pressures.

Economists distinguish between push and pull through inflation. Push inflation refers to supply driven price increases whereas pull-through inflation pressures are associated with rising prices because of excessive demand in the economy.

Interest rates are an effective tool against pull-through inflation dampening demand by increasing rates and draining liquidity from the economy, but not for push-through inflation. Global inflationary pressures are currently both a push and pull-through phenomena.

Push inflation pressure resulted from covid supply disruption and global bottlenecks for the supply of goods, which has now been exacerbated by the Russian / Ukraine crisis. Both Russia and Ukraine are major suppliers of raw materials, which has seen oil and gas, metal, and grain prices skyrocket.

Unfortunately, the spike in supply prices coincides with a period of unprecedented fiscal and monetary policy support by central bankers to offset the effect of covid lockdowns, this is fuelling pull-through inflation as pent-up consumer demand supported by strong household balance sheets drives consumption.

The combination of push / pull-through inflationary pressures and underlying inflation psyche is likely to see inflation remain a sticky problem with dire implications for everyone.

 

Mark Williams
Mcomm, CFP®, HdipTax
T. 021-205 1133
Email. service@mwwealth.co.za

 

 

Sticky Inflation
Tagged on: