Inflation blame games are designed to distract you from inflation itself

I’m back from paternity leave (at last). Did I miss anything?

… Oh?

… Oh my!

… Holy cow!

This is what happens when I leave you alone for two weeks, is it? Complete chaos! Utter carnage!

What hasn’t happened in the last two weeks?

It’ll take some time for Fortune & Freedom to catch up, then. To explain what’s really been going on, including what’s up behind the scenes.

And, of course, what it all means for you and your money. Or rather what’s left of your money after inflation.

Let’s start with this piece of important news.

The Financial Times reports that:

A Japanese technology start-up is banking on being able to deliver physical pain to people in the metaverse, one of a growing number of companies vying to profit by providing real-life human experiences in virtual worlds.

Having lived in Japan for a few years, this news doesn’t surprise me at all. But I’m not so sure we’re going to need this new technology in the West. There’s plenty of pain out there in the real world, for those who choose to live in it – and indeed pay for it.

Petrol prices have become a running theme on social media. People simply post pictures of what they’re paying at the pump. Says it all, really.

Heating bills, rent and shrinkflation are also becoming as popular as discussions about property investing.

People can feel the treadmill speeding up beneath them. And they don’t like it.

Food prices will be the next big hit… to your wallet. Something we’ll cover in tomorrow’s Fortune & Freedom, in which I’ll make a big announcement.

But our consumer prices are nothing compared to the prices producers are paying. So called factory-gate prices are going ballistic.

The German Producer Price Index was up 25% year-over-year for February, and  Italy’s rose almost 42%.

Yes, this does bake into the cake more consumer price inflation in the future. Rising producer prices were, after all, how our contributor John Butler first alerted readers to the current inflation weeks before it kicked in. But, these days, even the Bank of England expects consumer prices to rise about 8% for the year.

However, we may actually be beyond the point of simple inflation. It’s now cutting into production itself, rather than just prices.

Germany’s biggest aluminium producer is slashing production in my birthplace, Essen, by 50%, for example. “But that’s just the beginning”, I can translate for you, from Die Welt.

If the energy price spike endures, says the company’s Vorstandschef (whatever that is), Germany’s entire aluminium production is at risk. There are already 800 staff on shortened working hours. Sound familiar?

Keep in mind here that Essen went from being a major coal-producing region in the time of my grandparents to shutting down its last coal mine recently, and it also received an award for being Europe’s greenest city when I visited last. My grandmother took me to a coal-mine museum while proclaiming this, without spotting the irony.

These days, Germany is raising coal reserves and bringing mothballed coal power stations back online to keep the lights on.

Spanish steelmakers are shutting down, driving European steel prices to a record level. We’ve covered Dutch greenhouses before. In Australia, construction companies are going bust one after the other as their costs spiral out of control.

All this disruption to production is why fear of stagflation is rapidly replacing fear of inflation. Indeed, a supply shock is inherently stagflationary in a sense. Prices rising because of shortages is not the same as a booming economy pushing up prices.

But here’s the interesting bit. We are still badly divided over the cause of all this. And when you misdiagnose, your cure is liable to be worse than the disease. Not that this will stop governments from responding.

But first, what’s behind our inflationary ills? Is it the war in Ukraine? Is it manic monetary policy? Is it green energy? The pandemic? Is it Trump’s fault? Brexit?

After all, if the Ukraine war is behind all this, then it’s practically your patriotic duty to pay up at the pump.

By the way, the argument that Ukraine can’t possibly be behind our cost-of-living surge because the surge happened before the invasion is a little iffy.

Markets, particularly energy and commodity markets, often use long-term contracts and futures pricing. Contract prices factored in the risk of what has happened in Ukraine months before it happened.

Of course, that’s not the same as saying markets predicted the invasion and got it right. It just means that energy producers were likely charging a premium for the risk and the potential of an invasion well before it took place.

Since then, energy prices have soared again, and some have plunged again as oil and gas continue to flow, and to fund Russia’s war effort, despite sanctions.

What about the green machine? Is that to blame for our energy mess?

Even the journalists are turning on their masters when it comes to the government’s latest attempt to save the world. “The Government’s absurd commitment to Net Zero is impoverishing the nation,” I read in The Telegraph; “Decarbonisation dream becomes a nightmare for West,” in The Australian; and Bloomberg analyses how, “An Island Paradise Offers a Cautionary Tale for Net-Zero Goals”. Let’s just say that the used batteries are already piling up in a warehouse…

But don’t worry, the government is on the case already!

Germany has plans to establish strategic coal and gas reserves, the United States is negotiating with its friends Venezuela and Iran to procure more oil from them and nuclear’s back in fashion in Belgium.

Despite these promising solutions, governments are also turning to more desperate measures to keep the economy going. Excess profit taxes, energy price caps (which worked so well in the UK) and more.

Get a load of this from ecological transition minister Teresa Ribera, who is considering a price cap on energy in Spain:

If there is no European solution, we would have to consider challenging the European system. We are not going to allow the Spanish economy, Spanish families and industries to adjust by not consuming and closing down.

Did you ever think you’d hear that from a Spanish ecological transition minister? What’s next? Will Michel Barnier turn on Europe’s open border policy?

The more or less dirty fossil-fuel industry has long been suffering under the combination of state subsidies and taxes – a unique combination that only civil servants could think up.

But, in an attempt to phase them out and make them more affordable at the same time, our government is winding down subsidies and has pledged to cut petrol taxes.

What about my own favourite bogeyman? Are central banks behind the cost-of-living mess? I blame them for just about everything else, let’s face it.

Well, it is the central bankers’ job to manage inflation. But if we define inflation as the devaluation of money, instead of just rising prices, then it’s not so clear that they are behind the problem.

Just as central banks are not necessarily directly to blame for the war in Ukraine, misguided green-energy policies or the pandemic, they may not necessarily be directly to blame for rising prices.

So, my answer is that we don’t know where the blame should be apportioned for our cost-of-living crisis. But we do know that it will likely get worse as the government’s myriad solutions begin to take effect.

At an editorial meeting, admittedly of the Australian newsletter publisher I also work with, we recently discussed all this in detail. Where does it leave our readers? How does it impact them? How do they feel about it?

My own contribution to the discussion was as follows: you can ignore a tech bubble like that of 2000. You can ignore the cryptocurrency boom, the meme stock craze, non-fungible tokens and bizarre short squeezes in obscure companies.

Some of us can ignore a global financial crisis like that of 2008 and the European sovereign debt crisis of 2012. Maybe some of us can even ignore rising interest rates and recessions. Heck, the pandemic had very little impact on my own personal life thanks to the arrival of two children in the last two years.

But nobody, and I mean nobody, can ignore what’s going on now. Inflation, and commodity price chaos, stagflation and shortages impact all of us very directly, in ways that we can’t ignore.

There is a long list of reasons for this, and the cost of living is simply the most obvious one.

But this is a fundamental shift for our industry – for the world of newsletter writing. We usually have to make people care about what we write about. To make them realise the threat or the opportunity that’s out there, if only they’re willing to see it.

This time, you’ll be coming to us. And this is what we have waiting for you.

Nick Hubble
Editor, Fortune & Freedom