It is, according to the Financial Times, “the largest inflation shock since the 1970s.”
And to all intents and purposes it’s only just beginning.
Yes, the proponents of Modern Monetary Theory say it’s only a blip in an otherwise expertly executed monetary plan, and yes there are plenty of pragmatists around who say that once the last of the coronavirus restrictions dissolve the supply and demand imbalance will correct and push prices back down.
But the problem with this way of thinking is that the current inflationary spiral didn’t actually begin with the onset of the coronavirus crisis.
In fact, the predilection for central banks around the world to print money hand over fist has been with us at least since the global financial crisis of 2008, and to a degree dates back even as far as the dotcom bubble.
Inflation in asset prices and commodities has been with us pretty much consistently ever since the early part of the first decade of the millennium. In part, of course, commodities prices were driven up by the arrival of a huge new hub for demand – China. Indeed, when demand rises, prices are supposed to go up – that’s what markets are supposed to do.
But the clever part, the sleight of hand cast by most Western governments, was to engineer stable consumer prices even as the value of everything else was going up. That way, it didn’t look like inflation was rising and any repeat of the negative headlines of the 1970s could be avoided while the politicians concentrated on getting re-elected and the central bankers continued to recommend each other for their various lucrative sinecures.
Of course it couldn’t go on forever, and what we are now seeing is an unravelling that was always inevitable but which has come upon us more rapidly than any economist or Modern Monetary Theorist anticipated. The virus has speeded up a process that was meant to proceed slowly and incrementally - and unnoticed.
Or unnoticed at least until it’s too late. The common analogy is that of a lobster being boiled in a pot - it notices the heat increasing by tiny degrees, but never appreciates the cumulative effect until it’s too late.
The virus, though, has caused the heat to be turned up too rapidly, and people are starting to notice that it’s getting hot. The gradual decline in middle class purchasing power that has occurred over the past four decades is now being thrown into stark relief.
And there may be worse to come.
Because the way to tackle inflation is high interest rates, as anyone who studied the economic conditions of the 1970s and their aftermath in the early 1980s knows. But guess who is highly leveraged and reliant on low interest rates to fund continued ownership of the assets that are otherwise being inflated out of their reach – the European and North American middle classes, that’s who.
Or to put it in more general terms, there’s an ongoing multi-generational shift in wealth away from the Western middle classes and towards the super-wealthy, the welfare state and the emergent capitalist classes in China and elsewhere in the Far East.
In historical terms, there’s nothing inherently wrong in this. Influence constantly shifts around throughout the ages. But don’t expect those living through it to go quietly in the information age. The cries of pain are issued equally from the perspectives of the left and the right, and they both say the same thing: we are losing influence and power.
Historically, many things cause shifts in influence like this. But this time round, inflation is in the vanguard.