Inflation may be higher than official measure - Makhlouf


#1

“The Governor of the Central Bank has said price inflation experienced by households may be higher than what is officially measured.”

Link to article on RTE News here: https://www.rte.ie/news/business/2020/0914/1165123-central-bank-on-inflation/


#2

No sh*t sherlock, Dunnes Stores can relieve you of €10 for a kg of rice if you don’t watch what you put your hand on, it’s a fifth of that price in Lidl.


#3

What I found interesting was the lines:

“He said the Central Bank last looked at the methods used in measuring inflation back in 2003 and that it intended to re-examine them in the light of Covid. The Governor also encouraged people to become involved in the European Central Bank’s review of monetary policy and price stability.”

I wonder will the ECB be looking at a new methodology to ensure they reach their inflation target?


#4

Interesting article by Martin Wolf in yesterday’s Financial Times titled " Why inflation could be on the way back".

He reviews a new book by two economists where they believe that "as in the aftermath of many wars, there will be a surge in inflation, quite likely more than 5 per cent, or even on the order of 10 per cent in 2021”

He also gave their viewpoints some credence.

Link to FT article here: https://www.ft.com/content/dea66630-d054-401a-ad1c-65ebd0d10b38

Just to add, the same article has now also been published in the Irish Times here: https://www.irishtimes.com/business/economy/why-inflation-could-be-on-the-way-back-1.4412554


#5

Good news for anyone with a mortgage, if this transpires

Especially given that central banks have effectively said they will not raise interest rates for some time if/when this happens


#6

I don’t believe so. They may allow inflation to hit 2.5% or 3%, but if these economists are right about inflation hitting 5% - 10% next year, the ECB will raise interest rates very quickly.

Most countries in the eurozone and the wider EU don’t have a debt problem and they’re not going to allow inflation get even close to c. 10% without demanding that the ECB take action. Once inflation is out of the bag, it’s near impossible to put it back in.

This is evident by Hungary and Poland blocking the EU’s COVID-19 recovery package at the moment. They may want the money, but they don’t need the money.

If inflation starts nearing c. 10% next year (as those economists predict), the ECB will move fast and increase interest rates to c. 5% very quickly and mortgage rates in Ireland will jump to c. 8%.

The debt problems of Ireland (the third highest debt per capita in the world pre-covid) are meaningless to them. We would hardly make the front pages in Germany if Ireland fell into the Atlantic ocean in the morning. Italy’s etc. debt problems are regarded in the same way IMO


#7

High inflation would be good news for those in debt, as high inflation would erode the value of that debt.

It is bad news for savers, as the value of their savings would be eroded away.

If you believe inflation will go to 10% next year, borrow as much as you can now & lock in a 5y fixed rate - can get rates below 2%.
If inflation shoots to 10%, watch your salary increase, your asset value increase, and your debt payments stay the same, while all the savers will see their savings erode away


#8

Unfortunately, I don’t think it will be like the last time there was high inflation globally. This time we’re in an EU where the majority of member countries have wage levels significantly less than ours.

If wages rise much further in Ireland many of the multinationals will leave (or at least decide not to locate here in the first place) and they will leave even quicker if the upcoming OECD global tax reforms, CCCTB and digital taxes make the tax advantages to being here mute.

We’ve already seen over the past 5 years how quickly they can move money in and out of our country and how quickly they can relocate staff if they wish to e.g. WFH

I think this time we’re going to see high inflation combined with ever increasing interest rates, falling wages, less tax revenue, tumbling property prices and our starting point is a national debt level which is the third highest on the planet on a per capita basis.


#9

High inflation in Ireland at the same time as tumbling asset prices and wages? This is the opposite of inflation, i.e. deflation.
Again, high inflation would be good news for a country/household with high levels of debt, as inflation would mean that the value would be eroded away. Do you understand?
Most Central Banks in Western society are desperate for some inflation.
As I said, if you believe we’re in for 10% inflation next year, one of the best trades you could make would be to borrow the most amount of money you can at a 5y fixed rate.


#10

A rising tide floats all boats, why would inflation cause wage pressure here but not in France, Germany and Italy?

The unions will see to that eventually, there’s no way they will settle for <1% annual increases when a food, clothing and mortgage payments have increased by multiples of 1%


#11

I don’t believe this will be like 40 years ago. The unions only carry weight in the public sector and not the private sector. The wage demands in the public sector can only be met by the taxes paid by the multinationals and their workers.

If inflation rises like those two economists predict, a 10% hike in wages in e.g. Poland is not as significant as a 10% rise in wages here as our wages are already at the higher levels in the EU.

The option for companies to relocate service based staff to other lower cost countries in the EU quickly and with little disruption (e.g. WFH showed this) simply wasn’t there 40 years ago so I think the impact of high inflation won’t play out like last time in Ireland IMO


#12

Correct, but the effects on wage/pay disparity filter through. The money finds it’s way to the private sector in many ways, and supports e.g. increases in rates charged by tradesmen (plumbers, tilers, sparks) who will do so because they are facing the same inflation burden and this supports their supply chains like the builders providers and their staff and so on.

FDI will have at least some tailwind because of Brexit for a while too. The extant multinationals, well moving a pharma plant is not a small decision, the plant infrastructure is a sunk cost, cheaper to build new than move. The salaries and wages are bearable because margins are insane in general.