Don’t worry about inflation. The politicians and their monetary henchmen, the central bankers, are onto the problem. They’ll soon have it under control. Indeed, inflation is rapidly coming back down already, right?

Not anymore! A string of hot and hotter than expected inflation data has struck fear into everyone who doesn’t look at the mainstream media.

Within the mainstream media, the turn in inflation data isn’t getting much of a mention. Funny, that…

But we have to follow the science regardless.

In the US, inflation data is still declining, but the stats are starting to surprise economists by coming in higher than expected.

Recent Spanish and French inflation data did likewise, but also outright rose.

If this is the beginning of a trend and inflation comes back before it ever left us, financial markets are in for a huge shock. They had a small one already after the European figures came out.

Why? Right now, assets are priced based on the assumption that inflation will come crashing down over the next few months. This will allow central banks to cut interest rates.

If inflation turns up instead, a rather large gap between expectations and imminent reality emerges. One that implies a lot more interest rate hikes from central banks than anticipated. That’d make the bond market, property market and economy implode, again.

To understand what’s going on inside the figures, let’s take a quick detour into the murky world of statistics.

There’s a quirk when it comes to inflation figures. Well, there are loads, actually. But let’s focus on a few with a simple example…

Imagine an inflation data set that showed 0% inflation for two months, 10% inflation for one month, than the 0% inflation for the following 11 months.

What would inflation be, according to that data?

Well, monthly inflation would be running at 0% for the last 11 months, so inflation would be 0%, right? After all, the inflation ended 11 months ago.

But we tend to make comparisons based on annual data, which is often called “year over year”. Compare prices year over year and a single monthly inflation spike of 10% 11 months ago means you have year-over-year inflation stuck at 10% for a full 11 months after inflation has actually stopped. That’s because prices are up 10% on a year ago.

If you have another month of 0% inflation after the last 11, bringing the string of no inflation months to 12, your year-over-year inflation statistics suddenly hit 0%. Prices haven’t gone up for a year.

Prices haven’t come down from high levels, it’s important to note. And nothing actually changed that month – it was just another 0% inflation print. But, because the month during which 10% inflation occurred dropped out of the year-over-year comparison, because it happened more than a year ago, the inflation rate plunges.

In other words, when measuring inflation, you need to pay attention to what was happening a year ago, not just what has happened since. You need to understand the month that dropped out of the data, not just the month that was added. Changes in what happened a year ago can amount to a better explanation for why inflation figures rose or plunged than anything recent.

Of course, inflation data is never that simple. Especially for the last two years…

But can you think of anything that happened a year ago which might’ve impacted inflation data over the subsequent months…?

In other words, the inflation prints we’re getting may be reflecting the lockdowns and invasion of Ukraine rather than recent data.

Indeed, the frequency with which inflationary shocks appeared over the past year is what made inflation data spike so much. Rather than one month with big inflation prints that mangled year-over-year comparisons, we had the war in Ukraine, lockdowns and more spike prices repeatedly within 12 month periods.

But those bulges are making their way out the other end of the python, bringing year-over-year inflation stats crashing back down, even if prices continue to rise.

Here’s another way to put it: inflation is not reported in a cumulative way, because you lose a month’s inflation each time a new month’s data comes in. A two-year inflation comparison might be more helpful to highlight what’s going on over time.

The Bank of England’s inflation calculator helpfully tells me that it now takes £123.56 to buy what £100 did in 2021. A 23.56% inflation rate over two years is a lot more meaningful than the ONS’ “the (CPI) rose by 10.1% in the 12 months to January 2023,” isn’t it?

Which is also a reminder that inflation is subject to compounding – another reason to stick to year-over-year comparisons only if you want to hide the overall impact of inflation.

One reason why older people are more alarmed about inflation is that they are more likely to notice this compound effect. Prices are not just going up fast, they’re rising multiples of the prices they used to pay a long time ago.

Now you might think that 23.56% inflation over two years alone is enough to get you fired from your job of hitting a 2% inflation target. But why?

After all, it’s not like the Bank of England caused the inflation, is it?

Is it?

It’s not like they created vast amounts of money to monetised government deficits… is it?

The recent narrative in the media is that corporate profits account for the spike in prices.

But protestors decrying capitalism are missing one thing. We live in a centrally planned economy. Not quite like we used to, with rationing, state-owned enterprises and price controls. That sort of thing isn’t politically viable. It’s too easy to blame and boot out politicians under such a system. Which is why centrally planned economies and democracy don’t go so well together.

Instead of a government-controlled centrally planned economy, we’ve handed over control to the central banks of the world. And, instead of meddling in the minutiae, like the price of coal or setting wages in particular sectors, they control the price of everything by way of controlling the price of money – the interest rate.

Thus, the blame sits squarely on central bankers and their manipulations. Whether inflation manifests itself in US house prices (2006), the stock market (1999), or corporate profits (today), the source of inflation is the same. Don’t mistake symptoms for causes.

Their inflation is so high that central bankers have come up with a clever solution: raise the inflation target. After all, if at first you don’t succeed, aim lower. Or, in this case, higher.

One of the candidates for the role of Federal Reserve vice chair is a proponent of the idea. At least, she wrote a paper suggesting that a 3% inflation target would’ve helped dig the US out of its hole in 2008.

So far, the policy creep has been a milder version of outright changing the target. Central bankers are changing the timeframes instead, arguing that 2% is a long-term goal, or an average over time (implying that years of low inflation should be compensated for with higher inflation).

I suspect that they simply don’t know what they’re doing and the target is what FA Hayek called “scientism”.

If changes to the inflation target seem unlikely, consider that, in the US, the 2% inflation target is barely ten years old. And the 2% target is only as old as me, if you believe its inventors, New Zealand, are a notable enough start.

When I learned this fact in high school, inflation targeting was considered unproven. Perhaps it will continue its traditional journey of economic ideas past proven and into disproven soon.

Anyway, when it comes to the policy to slay inflation, “two years to flatten the curve” may soon face the same subsequent waves as Covid did. Price controls will become mandated, you’ll wear cloth on your face to stop you from eating, and you’ll be muzzled from discussing inflation online.

And then they’ll bring in CBDCs to control how you spend your money directly…

Nick Hubble
Editor, Fortune & Freedom