Weekly Brief: These Guys Should’ve Seen Inflation Coming, And We’re Paying The Price

Weekly Brief: These Guys Should’ve Seen Inflation Coming, And We’re Paying The Price

about 1 year ago4 mins

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Central banks’ rate-hiking campaigns might have caught you unawares when they started, but it turns out the scene’s been set for a while…


  • US inflation data came in better than expected on Tuesday, keeping up the good news from the month before
  • But the Federal Reserve (the Fed) raided the party, whacking everyone round the head with their inflation’s-not-going-anywhere hammer on Wednesday
  • Then folk spotted some copycats across the Atlantic, when the Bank of England and European Central Bank (ECB) made like the Fed

✍️ Connecting The Dots

The story of seemingly ever-rising interest rates has been the talk of the town this year, so you’d be forgiven for thinking that rates have been close to the zero-mark for, well, ever. Thing is, 4 or 5% interest rates have been relatively normal over time – you only have to go back to the mid-2000s for rates of 5% in the US, for example. And back then, there wasn’t the feeling that rates were at an absurd level. In fact, call up any grumpy boomer from the school of hard knocks, and they’ll regale you with tales of 15% mortgage rates and “living within their means”.

So, why all the fuss? Well, it turns out that keeping rates lower for longer wasn’t a very good idea. And that’s not just hindsight speaking: it’s been a giant elephant in the room for most economists and rate-setters for much of the last decade, but central bankers fell hostage to the financial market’s fortunes and backpedaled every time their hiking plans were met with market tantrums. So low rates stuck around, and we all got used to an ultra-low cost of debt – and turned a blind eye to whatever could happen if rates flew higher.

But now that interest rates are being forced higher by rampant inflation, folk are being hit with a double whammy of higher prices and chunkier interest rate repayments on mortgages. There is a silver lining though: kill this type of inflation early, and that will stop the idea of endless rising prices from creeping into our psyches. Otherwise, we’ll be drawn into buying before prices rise, making a stubborn cycle of demand-driven rising prices harder to break. At this point, central bankers think that some tough talking and targeting interest rates at 4 to 5% next year should do the trick. If they’re right, and if economies avoid a damaging recession, we could be starting over with a much healthier interest rate – and a brighter future.

🥡 Takeaways

1. Mo’ wages, mo’ problems.

Americans are seeing their wages tick up around 6% on average. That might sound good, but it’s not helping inflation – and that has the Fed biting its nails. See, the problem is that a supply shortage is causing companies to jack up pay to attract limited workers, and there’s little to nothing the Fed can do to increase that talent pool. There’s around two job openings for every unemployed person right now, so while it might not be very festive, the Fed’s hoping that US firms will start taking an ax to their payrolls.

2. Three strikes, you’re… up for a small pay rise.

Wages are causing drama across the pond too, but for different reasons – just ask the British commuters who are contending with transport strikes over pay disputes. Around six million people in the UK – that’s 18% of workers – are in the public sector. So whether or not you sympathize with those pay grievances, the fact remains that the hard-up UK government can keep a lid on wage inflation for a hefty chunk of the economy. That’s not the case in the US, where the public sector makes up a smaller 13% of workers – maybe that’s why the Fed’s so worried about wage inflation.

🎯 Also On Our Radar

Tesla’s shares are down almost 60% this year, lying below the price at which they entered the S&P 500 with such fanfare back in December 2020. That means the firm’s all-work-and-no-play CEO Elon Musk is no longer the world’s richest man. That title now belongs to the finely-clad Bernard Arnault, CEO of French luxury giant LVMH.



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