Tag: UK

Who is Beating Inflation?

Due to a consequence of mistakes in fiscal and monetary policies, inflation in 2022 has jumped to levels not seen in decades in the western world. The good news is, US inflation now seems to be heading back down to 3%, the UK has broken through the 8% barrier, while Europe is still hovering around 5.5%.

As the US always leads in most things, one should expect both the UK and the Euro area inflation to slowly trend back down to the ranges that policy makers like by year-end. Therefore, two questions beckon. Have we beaten inflation? And if so, who beat inflation?

The answer to the first question is that we need to see a few more readings to be sure that inflation has been tamed.

The answer to the second question is more interesting. We need to look at the causes of inflation. In the last three years, the world has witnessed unprecedented disruption due to the war in Ukraine, and the effects of Covid-19 which forced governments around the world to lock people at home and pay supplemental income to those who lost their jobs or simply couldn’t ‘work from home’. Governments that prevented people from working had to take on the responsibility of paying them, and this was done both indirectly, by helping companies and directly, individuals.

The problem was that governments made a dosage mistake. Most people in the developed world, especially the relatively affluent young professionals, tend to spend an important portion of their income on entertainment, eating out, and travel. Due to long lockdown periods, the supplemental income that people received, that was not spent, increased savings. These savings were initially invested in stock markets, cryptocurrencies, watches and the like. But then, as the world reopened, pent up demand for travel, restaurants, and entertainment resulted in a flood of money into a plethora of services, that were themselves facing supply shortages in every aspect imaginable while they ramped up their capacities. Scarcity of service staff at restaurants, handlers at airports and the inability to refill old positions due to people moving for various reasons during the long lockdown period lead to higher costs in the aftermath of the lockdowns. And to compound policy errors, as soon as he got elected, Biden decided to give more money to more people in an unprecedented stimulus package while the effects of Covid-19 were subsiding, in a move that most economists thought was a colossal fiscal policy error.

The result: low supply of goods and services, high savings, new stimulus, and pent-up demand, high inflation. Prices moved up, and if history is an indicator, they will not really come down. There has been a parallel shift in the curve but inflation is not a measure of price levels, it is a measure of acceleration. Just like getting sucked in to your seat on a plane during take-off at 250MPH but not feeling anything when it stabilises at 550MPH, what is felt is acceleration, not the static higher levels of speed.

Monetary authorities, who were asleep at the wheel when inflation started moving up and were still priming the economy with low rates and quantitative easing (remember QE? Simply put, buying bonds and increasing money supply), had to catch up rapidly and deliver nearly constant monthly interest rate increases that have brought short-term rates around the world from around zero to the 4-6% band.

The question to ponder is, was it higher rates that was taming inflation? If inflation went up because of a supply and demand mismatch that has since subsided, perhaps inflation too has now stabilised after moving the prices higher. This would mean that this stability has less to do with higher rates and is more a result of the absence of the reasons that brought it up in the first place. Or alternatively, we have entered a price-wage spiral reminiscent of the ‘70s that will take much longer to cure.

The next few months will tell. In the meantime, medium-term low risk bonds could be a bargain in either scenario.

Long Vaccine…

Nearly 18 months later, we are beginning to see some  patterns in Covid-19 which should help health and policy planners to manage what is becoming an Endemic disease, in the words of the Economist.

One of the interesting patterns is that the Vaccines work on a FIFO basis, in accounting jargon—ie First in, First out.

The most virtuous countries who vaccinated super early such as for example, Israel and the UK have seen a deterioration of the number of daily cases in the last few months, going back nearly to all time highs. Israel which was the global lab for Pfizer went from 10,000 daily cases in February to below 100 in May and then back to 10,000 in the summer. At that point, the country trailblazed again with the quick adoption of the booster, and numbers are now back down to several hundred per day.

In the UK a similar but not identical phenomenon is taking place. As an early adopter, most UK residents are beginning to count six months from the second dose, and daily case numbers are spiralling. But there is a big difference, whereas in the spring 40,000 daily cases meant nearly 1500 deaths, today the same amount of cases amount to ‘only’ 150 daily deaths.

Perhaps we can learn as follows: firstly, vaccines seem to give a medium to long -term protection from serious illness and death; however, protection from catching the disease only lasts up to six months. Israel is going for eradication of daily cases via the booster, the green passport, and the usual distancing rules, which keep on being prevalent. The UK seems to have decided that the booster is enough to manage the epidemic, without resorting back to any restriction. The one issue it has is that in order to make people take the booster, there has to be some ‘get out of jail’ incentive and the one that has worked better in most countries (eg France) is the vaccine/green passport. For ideological reasons (UK citizens don’t even need to have an ID card…) Boris Johnson is resisting this and therefore he has to cope with slow booster take-up and high daily cases, which it can stomach until the NHS copes and daily deaths are ‘acceptably’ low.

The coming winter months will test both these conclusions.

Toxic Cocktails

The combination of Covid-19 and Brexit have turned back the clock on the traveling smoothly by 70 years.

Until 2019, frequent and not so frequent travellers used to take for granted that they could whisk in and out of their countries without ever speaking again to a border agent. E-gates had become the norm, at least in European countries.

Travelling now in 2021 is more akin to dodging landmines. Every week states come out with new and more complex regulations, including paper based and digital forms, first pioneered by the UK and now imitated by EU states. The PLF (Passenger Locator Form) has become a dPLF in the EU; however, not all European countries demand it, yet, and there doesn’t appear to be a site that informs passengers which countries do or don’t ask for it.

Travelling on the Eurostar between Paris and London and vice versa has the added complication of Brexit. Travellers going from Paris to London will have to have their travel documents checked four or even five times before they get on the train. They will have to come up with a good reason to leave France, and a better one to go back to the UK. Once they reach the UK, they will see a barrage of customs/border police officers looking for….? Given that all passengers are already checked at the Paris UK Border Police booth, what is the need for the extra scrutiny in London?

The same is true for the opposite direction of travel. Travellers landing at la Gare du Nord will see a dozen French customs agents scrutinising their faces and luggage looking for…?

If all of this is not enough, the French authorities have just announced that they will require travellers from the UK to isolate for a week; however, they are also told that nobody will bother to come and check. The UK of course does the same thing (but there they do check with ‘volunteers’ that look like Uber drivers that visit your house at random) as France is of course, an Amber country.

I have a simple question. Why does a traveller from France need to be checked five times when a traveller from Colombia will get away with one or two? What incredible extra danger do these Eurostar travellers present that they should be scrutinised to such an infuriating degree?

It is possible that a lot of these extra doses of attention are actually needed to prevent Claret coming back into the UK or the Indian variant to contaminate Europe…. but this degree of zeal smacks a lot like a political tit for tat. The French and the English have had periods of tolerance and periods of mutual antipathy, you can guess what is today’s direction of travel…

Learning the lessons?

This week marks the approximate anniversary of the arrival of the Covid pandemic in mainland Europe. It is notable that while certain towns and regions in Italy were already in lockdown mode at this time last year, other countries such as the United States seemed to be immune until March. On this day last year, we were in Florida where everything was open and masks were unheard of. Meanwhile, Italy was already testing the body temperature of arrivals at airports, and beginning to curtail flights from China.

In the UK it was still more or less business as usual. In fact you may argue that it has taken the UK twelve months to get a hold on its borders, as the harshest measures have only been introduced in February….. 2021!

Consider the difference. Granted that we are worried about mutant viruses, but as of today, the UK has administered over 18m doses of vaccine; if you take into consideration the subjects who are somehow immune, or protected, because they had the virus already, and children who don’t seem to get sick, we are now getting close to 50% of the population being vaccinated or immune. In addition, one year ago, the UK had no real testing capacity. Today they are doing many hundreds of thousands of tests per day.

One would have thought that the borders should have been closed (especially to China) when the disease was difficult to diagnose (for lack of testing capacity) and non-curable/preventable (no vaccines and no effective therapy), and that the restrictions should be relaxed now that the combination of cheaply available testing and vaccines are an effective barrier to contagion. True, it is not proven that vaccination means non transmission. It is also true that testing (especially rapid testing) may not be exact; however, public policy in almost every field aims to minimise and not eliminate problems and to balance prevention with the negative effects of limitation of liberties, commerce, travel etc. No government gives its citizens a guarantee that the streets will be 100% safe from crime. Covid prevention should also fall into the minimisation rather than elimination, bucket.