Inflation is Accelerating, What is Causing It?
Summary of Bridgewater's most recent research paper on what is causing inflation
The supply of almost everything is at all-time highs according to Bridgewater, therefore, the cause for inflation is not predominately coming from pandemic induced supply chain bottlenecks.
In this research paper, Bridgewater makes the case that the inflation we are currently experiencing is mostly a demand shock resulting from Monetary Policy 3.
Monetary policy 3 (MP3) was the stimulus injection that was created in response to the pandemic.
It more than made up for the incomes lost as a result of the coronavirus shutdowns.
And the demand that came from MP3 isn’t likely to go away soon because, according to Bridgewater, there is more cash in the hands of consumers waiting to be spent, there is more fiscal stimulus on the way (Biden’s $1.2 trillion infrastructure bill) and there are extremely low real yields, or in other words, a lack of good alternatives to invest your money at a high rate.
It is unlikely that the Fed is going to move to more restrictive policies, therefore, this is likely to increase demand further, causing more inflation.
What follows is a summary from Bridgewater on the surge in demand and how supply is struggling to meet demand in almost every area.
In other words, there aren’t enough materials, energy, productive capacity, housing, workers and inventories right now.
- Supply is now higher than it was pre-COVID so this is a demand shock since demand has exploded and supply levels have recovered.
- Demand for services is likely to continue to rise which will create a demand for workers. Since employers are having trouble finding workers, this will likely put upward pressure on wages to incentivize them to work.
- Chinese production is 20% higher than it was at the start of 2020 and exports are 40% higher.
- Capital expenditures can alleviate some of these pressures by allowing supply to catch up to demand, but the paradox is that in the short-term, cap ex will result in a short-term increase in demand for raw materials which will provide an even further boost to demand, possibly resulting in more inflation over the short-term.
- Inventory levels are low and shipping rates are way up also which means it’s harder for businesses to get supplies delivered.
Housing prices aren’t fully reflected in the CPI inflation rate because of the way the CPI rate is reported but home prices are surging.
As shown below, one of the main reasons home prices are surging is due to the low level of existing US home inventory, but very low real interest rates and a tight labor market resulting in higher wages are contributing as well.
According to Bridgewater, there are a good amount more of job openings than there are unemployed people. And to add to their point, on November 12, 2021, it was reported that during the month of September, a record 4.4 million Americans quit their jobs.