Where does this high inflation come from?

The prices of many products have risen sharply in the past year. Where central banks tried to boost inflation for years, everything now seems to be accelerating. Inflation is often attributed to high energy prices and transportation costs, but according to value investor Bob Robotti, that's not the full story. If we look at the market from a greater distance, it becomes clear, according to him, where all the price increases originate.

In an interview with The Star Robotti explains that the prices of many products have remained low in recent decades due to globalization. Companies moved their production en masse to low-wage countries, which further reduced costs. Those lower costs kept the prices of products in the stores low. This increased the purchasing power of consumers in many Western countries.

China

In a few decades, China has become the factory of the world. They flooded the world with cheap products, along with a number of other Asian export-driven economies. But the time when those countries produced extremely cheaply is over. Nowadays, costs are also rising there, on the one hand due to rising wages and on the other hand due to more expensive raw materials. Producer prices in China and other Asian economies are also rising by double digits these days.

This means that many products produced by China are becoming more and more expensive. As Asian economies mature and develop a single market, they become less dependent on cheap exports. In addition, wages, costs that are passed on in the cost of products, are rising. And we notice that in Western countries in the prices in stores.

Central banks can't control inflation

What central banks have learned is that they cannot adjust prices to their own liking. After years of trying to boost inflation without effect, it now threatens to get completely out of hand. That's because central banks can't influence many factors that affect the prices of goods and services. Nor do they have control over labour costs and prices in other countries, where many goods are produced.

Robotti emphasizes that the U.S. economy, as large as it is, plays only a modest role relative to the global economy. Factors such as rising energy prices, higher transport costs and rising raw material prices can therefore only be influenced to a very limited extent by the US central bank. When prices in low-wage countries continue to rise, this also has an effect on prices in countries where these goods are used.

Is inflation temporary?

Many central banks insist that high inflation is transitory and use this as an excuse to stick to loose monetary policy for longer. This is a risky strategy, because persistently high inflation is very harmful to the economy and society. High inflation mainly affects lower incomes, because they spend a relatively large amount of money on groceries and energy. High-net-worth people have more opportunities to protect themselves against inflation, for example by buying stocks, real estate or precious metals. High inflation thus reinforces economic inequality.

Whether inflation is truly transitory remains to be seen. What is striking is that producer prices in many countries are currently well into the double digits. These price increases will be passed on to the consumer one way or the other. With all the consequences that this entails for the Purchasing power of households and the growth of the economy.

This contribution was made from Geotrendlines