Inflation - awaiting the inevitable?
The well-known saying about inevitability will have one believe the only two certainties in life are death and taxes. However, Dr Prieur du Plessis, chairman of Plexus Asset Management says an assessment of current global economic conditions makes a strong argument that a third inevitability is not too far away.
“I am of course referring to increasing inflation,” says Du Plessis. “Inflation will emerge and in some instances has already started to emerge under two distinct themes, namely high-growth emerging-market economies and low-growth developed-market economies.
“In the larger high-growth economies such as the BRIC countries, the concern about inflation is already having real policy-altering consequences on these markets. The textbook inflationary concern is apparent, where too much money is chasing too few goods.”
He says the continued infrastructure spend and increasing urbanisation have directly resulted in increasing commodity and food prices. China is the best example with continued spending on commodities.
“In a recent report by Bloomberg, stockpiling is now a new sovereign wealth strategy,” says Du Plessis. “This is not surprising as urbanisation is set to increase from the current level of 46% to 65% of the population by 2030, according to the Social Sciences Academic Press, the publishing wing of the Chinese Academy of Social Sciences.”
These economies are already being forced to put measures in place to try to keep inflation manageable. “Policies of increasing interest rates or raising banks’ reserve requirements are being implemented in parts of the world where high GDP growth has been the order of the day,” says Du Plessis.
The inflation concern in developed-market economies is under a more subtle guise and seems to be further into the future than the imminent concerns facing emerging economies. “While GDP growth has not been that strong in these economies, and some are facing austerity measures, the actions and continued promises by the respective reserve banks will eventually have an inflationary effect,” predicts Du Plessis.
Not too long ago deflation was a hot topic among market commentators. “Reserve bank governors across the developed world, and in particular US Fed chairman Ben Bernanke, assured the world that everything possible would be done to prevent a deflationary spiral,” says Du Plessis.
Consequently, quantitative easing started across the developed world. “When the US realised there was a possibility that not enough was being done, a second round of quantitative easing (QE2) was launched.”
In Europe, when it seemed economies like Greece and Ireland were going to default, stronger countries in the European Union like Germany and France were forced to bail them out for fear of the knock-on effect in the other EU countries.
“For the most part the inevitable has already hit emerging markets,” says Du Plessis. “Continued increasing demand within economies where higher wages are being demanded by growing populations will have an inflationary effect on food prices and anything else that cannot be produced at the same pace.”
According to Du Plessis, in developed economies the cash made available by quantitative easing under its many semblances has not fed through to consumers. “Most of this money has been used to shore up the balance sheets of large corporates that came under threat during the recession. When these companies are comfortable and this money moves into general circulation, a situation will develop where an excess supply of money exists,” he says.
Then, of course, there is the fact that emerging and developed markets are inextricably tied in the inflation debate. “Even in developed markets food and gas expenses make up a considerable portion of annual income, especially for lower-income earners,” says Du Plessis. (see accompanying chart).
“It is sobering to see that 28% of US households spend more than 20% (i.e. the lower-income groups ranging from $5 000 to $10 000 and $20 000 to $30 000 per annum) of their income on gas and food,” he says.
This would suggest the core inflation numbers (which exclude energy and food) often touted by developed economies are not telling the full story. “At the end of the day, is it more important what some propeller-head statistician calculates inflation to be, or what consumers actually experience in terms of increasing prices for staple goods?” asks Du Plessis.
According to Du Plessis, the least commented on aspect from a developed-market point of view and the factor that puts the cherry on the top is the excessive debt levels written up by these economies. “How else is this debt to be paid off other than by increasing inflation, resulting in a lower real burden? Or they could, of course, just print more money!”
Graph
Food and gas expenditure in the US, as a percentage of income per household.
(Click on image to enlarge)
