by Wolf Richter, Wolf Street:
It’s like a dam broke. And now higher interest rates and mortgage rates for much longer, with lower asset prices, as the Everything Bubble gets repriced.
So now the media suddenly focuses on this big problem I’ve been screaming about for many months: Inflation has shifted from energy and from goods tangled up in supply-chain issues to services where there are no supply chain issues.
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A great example is insurance. I guarantee you that there is an unlimited supply of insurance, and yet health insurance costs spiked by 24% over the 12-month period, and auto insurance jumped by 9%.
It’s small stuff too. I just got a 20% increase on my broadband service that I subscribed to a year ago to replace Comcast, which had doubled its monthly fee a year earlier.
Other service prices jumped too. Motor-vehicle maintenance and repair jumped 9%, and rents are spiking, and all kinds of service providers are jacking up their prices, and consumers are paying them.
That’s services inflation. And most of it is unrelated to energy and supply chains.
Yet gasoline prices have plunged from their highs in June, and many supply-chain issues that drove up prices of some goods have been resolved, and lots of commodities prices have come way down.
So now we’re dealing with inflation in services. This type of inflation means that something has seriously changed in the economy, and how the participants in that economy – so that’s consumers, businesses, and governments – are reacting to price increases. And how they’re reacting is that they’re paying those price increases.
Businesses are paying them because they know they can pass them on to their customers. Consumers are paying them, because they’re getting raises, and they’re still flush with cash from all the pandemic money, from the PPP loans, the mortgage payments and rental payments they didn’t have to make, and from the gains in real estate and from the cash-out refis last year, and from the gains in stocks and cryptos, though those gains have started to dissipate.
And governments at all levels sit on huge amounts of pandemic-era cash, and this cash is getting spent, and so wholesale prices go up and businesses pay them, and consumer prices go up, and people pay them. And it happened suddenly, starting nearly two years ago.
For many years, central banks have engaged in massive amounts of money printing and interest rate repression. The Bank of Japan started this over two decades ago, and it bought up a big portion of the government’s debt, and it repressed interest rates to zero, and in recent years below zero. It got away with it for years, and there was essentially no consumer price inflation.
And then during the Financial Crisis, starting late 2008, the Federal Reserve in the US started printing large amounts of money and it repressed short-term interest rates to zero, in order to bail out the bondholders and stockholders of the banks, and to inflate asset prices in general, to inflate stock prices, and bond prices, and real estate prices. And that didn’t trigger a big wave of consumer price inflation either.
And when the European Central Bank saw that neither the Bank of Japan’s money printing, nor the Federal Reserve’s money printing triggered consumer price inflation, but just asset price inflation, it too jumped into the game and printed huge amounts of money and repressed interest rates to zero, and then below zero.
And central banks of smaller countries were doing it, and just about everyone in the developed world was doing it.
And then came the Pandemic, and so now all these central banks that had been printing money and repressing interest rates without triggering consumer price inflation, went hog-wild, thinking that these many trillions of free money wouldn’t cause inflation either, because it didn’t before. But this time the amounts were a lot huger, and they came very fast.
