Why supply chain disruption means inflation is 'here to stay'

You can't turn economies off like a light switch, says expert, who believes there will be ramifications from shutdown restrictions

Why supply chain disruption means inflation is 'here to stay'

Inflation is here to stay as the impact of shutdowns and supply chain disruption take hold, according to one chief economist.

Brian Wesbury, of First Trust Portfolios, believes investors should expect 3.5%-4.5% inflation over the next two years, which will heap pressure on central banks to raise interest rates. It will create an environment that’s good for equities but “terrible” for traditional fixed income.

He believes the decision to shutdown economies across the globe will go down as “one of the biggest public policy mistakes that any country around the world has made” and that the restrictions, plus the decision to compensate people for losing their business or getting laid off, has created massive supply chain problems.

As a result, he said much of the world has embarked on an experiment with modern monetary theory where governments can spend anything they want, the central banks can print money to pay for it and we end up with no problems. It’s an approach he staunchly disagrees with.

Wesbury said: “You can't just turn off an economy like a light switch. There are way too many decisions being made by the market. This is why governments can't run the economies because the supply chains are so complicated.

“When you dampen down, turn off supply chains, cut off information in the marketplace, but then feed money to individuals to spend, you end up with imbalances between supply and demand - and we can clearly see that in the past six months. The producer price index is up 7.6% at an annualized rate and the consumer price index is up 3.6% at an annualized rate. In other words, we're starting to see broad-based inflation.”

The first place this was seen was in commodities; lumber prices were up 300%, corn up 70%, aluminium up 56%, and oil up 89%. The Federal Reserve believes this is transitory and that once the imbalances are fixed, inflation will moderate.

But Wesbury insisted that a large reason for the price increases remains the shutdown-driven supply chain problems.

He explained: “If you look at what the Federal Reserve has done, M2 is now up 27% in the past 12 months. Over the past three or four months, it's up about 14% at an annualized rate. These are the biggest monetary growth numbers we have seen going back to World War II, and when you have a bumper crop of dollars, the value of the dollar falls. In other words, it buys less and less and less.

“We see it everywhere. I do suspect that once the supply chain issues move out of the way as this year progresses into 2022, we’ll see a moderation of the really sharp price increases, however, inflation is here to stay. It's going to be a moment of truth – are we right or is the Federal Reserve right?”