US Edition
Ken Fisher founded Fisher Investments and built a fortune estimated at $6.3bn. He writes a monthly column for Telegraph Money
Is inflation really cooling? While the rate of price rises has slowed sharply in the eurozone and America, in Britain there are fears that inflationary pressures remain entrenched.
The war in the Middle East is reigniting worries over energy prices and the spectre of a “wage-price spiral” fans the flames.
How do I see it? When it comes to inflation, money supply trumps all. Its recent global cooling signals that future inflation spikes really are dead. Let me explain how it works.
First, understand this: cooling inflation is about normalising rates of inflation, not returning to pre-pandemic price levels. That simply doesn’t happen in Western culture. The distinction matters. Undoing the price increases of 2021-22 would take epic deflation on a par with the depression of the 1930s. You wouldn’t want the economic disaster that would accompany that. No one would.
But inflation has slowed virtually everywhere (if less in Britain than elsewhere), just as central banks from the Bank of England to America’s Federal Reserve wanted. How did this happen?
“Inflation is always and everywhere a monetary phenomenon.” So taught the legendary Nobel Prize-winning economist Milton Friedman, an early mentor of mine. He proved that inflation stemmed from too much money chasing too few goods and services. Reduce the growth rate in the quantity of money and inflation slows. His wisdom holds now.
Growth in the money supply stokes lending and spending, which feeds inflation, if with time lags that are somewhat unpredictable and variable. That is what fuelled hot inflation recently.
Britain’s money supply (on the “M4” measure) grew at a modest average rate of 2.8pc year-on-year in 2019 (and similarly previously). As part of its response to the pandemic the Bank of England had inexplicably quintupled that rate by July 2020, despite a locked-down economy. That spike was paralleled by other central banks globally. By mid-2020 America’s Fed was increasing M4 money supply by 30pc year-on-year. Idiocy!
Lockdowns disrupted supply chains, so newly created money couldn’t be fully spent immediately. Hence consumers couldn’t spend fully either. So inflation ignited later, when economies reopened. Banks, awash with central bank-injected money, ramped up lending. Loan growth in America and the eurozone hit double digits by 2021. Inflation soared.
Now? Britain’s money supply growth is negative – it has been since the summer. The money supply shrank by 3.9pc year-on-year in September, the latest data available. In the eurozone, growth in the money supply (“M3” this time) in July and August similarly contracted. In America (on the M4 measure) it has been negative throughout 2023!
Hence inflation slowed. Yes, Britain’s inflation is higher than in other G7 nations, partly because Britain’s energy price caps impede market price signals. They stupidly slowed the passing on to consumers of energy companies’ lower input costs in late 2022 and 2023. Regardless, headline CPI cooled in Britain to 6.7pc year-on-year in September and to 4.6pc last month – well below October 2022’s 11.1pc high.
Meanwhile, Britain’s “core” inflation (which excludes volatile food, tobacco, alcohol and energy costs) slowed to 6.1pc after 2023’s first-half reacceleration. A five percentage point fall is worth lauding!
More will come. Inflation follows global trends, as money crosses borders fluidly. In America the CPI dropped to 3.7pc year-on-year from a high of 9.1pc. The eurozone’s 2.9pc October CPI is far from the 10.6pc peak of a year before.
Many claim that returning to lower inflation rates isn’t assured. They fear that resurgent energy prices will push price caps in Britain ever higher and they dread those “wage-price spirals” of pay gains forcing price jumps. No!
US oil production is on course to break records next year, offsetting cuts from the “Opec-plus” countries. North Sea production is off its 1990s levels but ample reserves and scope for production remain, the Government’s new licence plan notwithstanding. Moreover, the Israel-Hamas war won’t wreck global supply. Direct oil industry exposure is minimal.
The price of oil has fallen by 7.1pc from pre-attack levels. Although the conflict could in theory spread to Iran, its oil industry has been sanctioned for years and hasn’t been robust. China, Brazil, Iraq, Libya, Nigeria and Venezuela are all boosting output. Natural gas prices are far below the peaks of 2022. Continental Europe’s winter gas storage was filled early even as Russian gas imports ebbed and as worries over pipeline sabotage in the Baltic remained.
Wage-price spirals? As real as the Enfield poltergeist. Yes, global wage growth – such as Britain’s 7.8pc year-on-year rate of increase in the three months to August – is hot. But Friedman also proved when I was young that wages always, everywhere follow inflation, never the reverse; they never lead or cause it.
Inflation easing as wage growth accelerates now demonstrates that perfectly. Still, few accept it – including the bird-brained economists on Britain’s Economic Advisory Council, with their excess wage growth “inflation tax” proposal. They really should know better.
Do you recall 2021’s stranded cargo ships and nosebleed shipping costs? Covid-era supply chain snarls have since unwound completely. Despite some drought-induced congestion on the Panama Canal, the cost of shipping goods has plunged. Costs on the Shanghai to Rotterdam route fell by 59pc year-on-year, Rotterdam to New York by 80pc and Shanghai to Genoa by 58pc. The New York Fed’s global supply chain pressure index fell to its absolute lowest level since data began in 1998!
Expect future inflation to keep cooling irregularly. Rampant inflation scepticism merely adds bricks to this bull market’s “wall of worry”. This sets the scene for the pleasant surprises that should soon reignite the stock market.
Inflation has been vanquished. It’s time for the stock market to reignite
Global cooling signals that future inflation spikes really are dead. Let me explain