Soapbox: Roger Mattingly: Global inflation
What is inflation? It is ‘to increase beyond what is normal’ according to my Collins pocket dictionary. In bubble or balloon terms, it can inflate constructively or can create great instability, vulnerability and ultimately — an explosion of chaos.
Inflation is increasingly thought to be the reason that we and this wonderful planet are here. Yet, in financial and human terms it can be very damaging because it results in an exponential downward spiral in the quality of life. There are only three things to fear — death, fear and compound interest — and when this works against you, a hiccup in global inflation is an irritant while a sustained up-tick can be highly damaging.
So what are we faced with currently — a blip or a long-term inflationary whirlwind? In Zimbabwe it is of Goliath proportions; think what a Section 75 valuation (or any valuation, come to that) would look like if increases were index-linked to a rate of more than 100 000%.
What about the future Asian economic powerhouses? China’s CPI is now comfortably over 8% and rising and it is in danger of going from an exporter of deflation to an importer of inflation. Of course, when a currency is as strong as the Chinese yuan then even huge volumes of escalating and pricey imported raw materials are inflationarily contained, though not devoid of impact.
Sometimes it is easy to forget (or fail to grasp in the first place) that approximately 80% of China’s growth is domestic, so a very small rise in the monetary earnings demands of one emboldened worker equates to a material percentage. Add that to the seemingly upward-only trend in the cost of feeding the world, whether it is maize, wheat, rice, soya beans or even potatoes, and yet more inflation inflates. People need more money and increasingly they can ask for, if not demand, it. The state can intervene but probably not at the expense of much treasured and currently superior economic growth. China’s industrial expansion has been at the expense of agrarian production that, compounded with a new desire to eat more grain-intensive meat, means an escalating demand and supply ratio.
So what of India and, for that matter, Russia, Brazil, Mexico, Vietnam and so on? The key in many of these countries is the ability to resource growth. If these states cannot supply it, either through indigenous or immigrant human resource or a combination of the two, then prices will almost certainly rise. It is not just the current ability to resource growth but the degree of future latitude that is vital.
Then there is global warming. The response is green policies and bio-fuel production on a grand scale. However, in the case of countries like Brazil it is not what it starts but what it stops producing — namely growing maize, wheat, rice, potatoes and so on for human consumption.
The real picture?
What is the real picture regarding fossil fuels? Are they waning in quantum to the extent suggested or is this the oil producers’ global game of cat and mouse? You want it; we have it. The answer does not really matter because the end result is the same: less production than is needed or, at least, wanted for these double-digit GDP growth countries.
What does all this mean? Assuming China’s economic and industrial will continues, capitalised by the Beijing Olympics and extremely ambitious construction projects such as the new Beijing Airport and the 38km sea bridge off Shanghai, then inflationary inflation is upon us and will remain with us.
This is true, of course, unless the US sneezing does actually cause a worldwide cold after all. Countries will have to risk-manage through monetary and currency policy and the management of human expectations — not easy when the world has more and wants more.
In conclusion, inflation may not be ‘back for good’ but it is not going to go away in a hurry.
Roger Mattingly is on the main board of HSBC Actuaries and Consultants and heads up its client relationship management team. He is also in charge of public relations on the governing council of the Society of Pensions Consultants.
Roger Mattingly
