The US Fed raised its guidance interest rates yesterday for the fourth time in four months. As on those previous occasions, the increase was by 0.75%.
The FT reports that
In other words, the pain is not stopping. Nor will it apparently do so until a result is seen, even though it takes up to two years for the impact of interest rate changes to be seen in the economy, meaning that Powell's comment was economically crass (to be polite).
Worse, contrary to what Powell says there are signs that inflation is slowing in the US. It will there just as it will here, simply because the math (US spelling) guarantees it. Once prices post the start of Putin's war are compared with prices also post the start of Putin's war are compared - as will be happening by April - the inflation rate will fall because the one-off shock will then be beginning to work its way out of the inflation calculation like night follows day. Apparently, the Fed doesn't understand this simple fact.
Meanwhile, the Fed is seeking to crush the US economy.
As important though, in my opinion, is the fact that the US Fed interest rate will also be crushing the economies of very large numbers of developing counties. They are forced to borrow in dollars - wholly unfairly - and as a result will have to fund many more dollars to pay the interest on their loans now. This will crush development and directly harm billions of people around the world as a result.
I guess Powell does not care.
I do.
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Jay Powell seems intent on sticking the boot in but there is an alternative – Japan.
There is lots of punditry about how it is all about to fall apart for the BoJ and the fall of the JPY is causing problems…. but I would suggest that most of it is not well informed.
What is clear is that different policies are being pursued and we will see which offers the better outcome.
Japan is not an outlier
It is an exemplar
Whether Democrat of Republican – as Michael Hudson has repeatedly pointed out the U.S. always puts itself first.
Rogue state? Yep! The original rogue state too.
Here’s the Governor of the Australian CB Philip Lowe explaining how they too are on a mission to crush the people “At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 2.85 per cent. It also increased the interest rate on Exchange Settlement balances by 25 basis points to 2.75 per cent.”
https://www.rba.gov.au/media-releases/2022/mr-22-36.html
Beginning to sound conspiratorial isn’t it? I wonder if we’re being softened up to accept CBDC perhaps on the basis they’ll claim to have imbued it with some magical property enabling it to become impervious to inflation, a nonsense to be enthusiastically taken up by the media and popularised. Perhaps there’s still time to read Tragedy and Hope before we find ourselves welcoming our new central banking overlords… though I doubt it 🙂
Previous experience, along with the associated data, clearly indicates the argument that inflation is likely to fall by April is sound.
The main elements of the analysis appear to be:
– The present inflation problems – not limited to the UK alone judging by the level of recent protests occurring throughout the European continent – are externally driven.
– The primary driver of this being energy costs – including gas, electricity, and oil derived products.
NB: This is having a secondary impact on other products. Fertilizer, food,
metals, transport & logistic, chemicals, pharmaceuticals and so on which
are also feeding inflation.
– Additionally this is also impacting on the ability of production facilities to
remain operational. Facilities which, once operations cease, may not be
physically viable in an engineering and practical sense to recommence
operations. The massive German BASF facility being merely one
significant case in point.
– There appears to be an explicit acceptance that energy companies are inflating prices and fleecing domestic consumers, producers, and Governments.
NB: Yet despite this the driver for these energy price increases, along with
the second order price increases detailed above, is implied to be not
the greed of the energy sector but the outbreak of hostilities in Eastern
Europe commencing in late February 2022.
– The assumption is, therefore, that inflation will fall as a result of energy prices, along with other commodities impacted by those price rises, not continuing to increase once spring arrives in 2023.
NB: Implicit within this assumption is that complex production facilities and
logistics operations which have ceased to operate as a result will be able
to seamlessly restart without any problems.
There are two issues which suggest that this assumption of the main external driver – energy costs – ceasing to increase at the present rate from next April may not necessarily be applicable in the present context.
1. The assumed timeline and causes within which the present energy increases occurred along with their secondary impacts on inflation for other commodities and products. Not forgetting the impact on the operational viability of complex production facilities and logistics operations.
At this point it is useful to note that the crazy, criminal and incompetent decision making which is consistently highlighted on this blog in relation to financial and economic matters is replicated in other areas by the same political class.
Thus; the facts are that energy prices did not suddenly commence rising at the rate they have on February 24th 2022.
For that we can thank an executive type decision of the EU around about the summer of 2021 to cease buying gas from Eurasia and rely on the speculative spot market at a time when storage capacity for the coming winter across the EU was exceptionally low. The UK storage capacity was even worse.
This started to impact in September 2021 as one month futures contracts on the spot market for October rose exponentially to over $1100 per thousand cubic meters. With December 2021 and January 2022 spot prices reaching $2000 per thousand cubic meters.
Interestingly, despite the continuing conflict in Eastern Europe the UK ONS were recently reporting a significant decrease in gas prices since mid-August 2022. Reductions which were not only not passed on to domestic and commercial end users but were further increased on October 1st 2022.
The situation has worsened further as a result of the recent destruction of the Nord Stream pipelines creating a shortage of gas energy supply options across the European geographical market. Whilst Southern Europe may likely have an option via Turkey, Northern Europe, particularly Germany, are left with few options beyond buying expensive fracked US LNG. Macron has already complained that US LNG sold to France is three times more expensive than it is in the US market.
Which is problematic because of practical issues such as the port, transport and other necessary infrastructure to import the required volumes being insufficient for present needs. Leaving aside the timescales to tender and construct those facilities a further constraint is the limited number of diesel powered tankers to ship the necessary volumes to the European market.
Which brings us to a further practical problem The dire energy situation and its impact is not helped by the further decision of the EU earlier this year to cease importing Urals oil by December 31st 2022.
As refining facilities have long been physically set up to process that blend of Urals oil – refineries not being plug and play – the question arises as to how the incompetents in charge intend to find the right blend not to wreck refineries permanently, never mind create the alternative port facilities, pipelines and transport logistics infrastructure to ship alternative oil into Europe looms large.
Less than 60 days to sort this. Either way, transported oil by sea is a lot more expensive than the cheaper long term contracts given up in an orgy of virtue signalling sanctions which give a whole new meaning to the term blowback.
This will have an across the board systemic impact in terms of diesel shortages and other vital oil derivatives. Feeding into inflationary price rises for anything which relies of diesel fuel – transport of goods such as for example. Or shipping LNG gas across the Atlantic.
After due consideration the assumption that energy prices are not going to continue rising into next year and beyond – and therefore feeding back into further increases in inflation not just for energy but also a whole series of other products which rely on cheap energy – is not one I would hang my hat on.
2. The assumption that the “shock” may subside is also one which may not survive the present context.
As others here have noted; the long term financialization and de-industrialization of the British economy has left the Country not only dependent on other Countries for production of materials and goods necessary to function but also with a deficit of skills, experience, and expertise.
A problem exacerbated across Europe as large swathes of productive industry – from food production and transport all the way up to chemical and metals – dependent upon complex systems are being shut down daily. UK market food producers were shutting up shop way back in January 2022 due to high energy costs. Meanwhile, much of German industry – particularly chemicals – is in deep trouble as a result of continuing increases in energy costs and no way to alleviate them.
In practical terms once a lot of these complex facilities shut down and relocate to the US or elsewhere much of Europe, including the UK, will be effectively de-industrialized beyond the point of practical recovery.
Unless a 180 degree course change across both the UK and the West takes place before the end of this year it is difficult to envisage in the present context any practical scenario in which inflation does not continue rising well into next year rather than leveling out.
I am not saying there will be no price rise. Next year.
I am saying without another war or pandemic they will be much smaller than this year and energy could easily fall
I think you disagree. Time will tell