The Short-Term
Recent price increases over the 2021 to 2022 period have substantially been caused by a shortage of fuel, a shortage of labour, and a shortage of goods relative to demand. That is, the huge injection of cash into the economy from Western governments has created very high demand. Those three separate and slightly inter-connected shortages have combined to increase prices.
Fuel
Normally, when there is a shortage of fuel, we could count on fuel suppliers to invest in producing more fuel. However, heavy future restrictions on the use of hydrocarbons for fuels appear to be discouraging businesses from investing in supplying more such fuels. The consequence is that prices are increasing – leading to big profits to the incumbents. Because investment in fuel supply is constrained, there is little new production and supply coming online.
The excellent book Where Is My Flying Car? by J. Storrs Hall gives an excellent overview of the energy constriction that our civilisation has suffered for the last half-century – and there’s no sign of that abating.
Labour
Normally, when there is a shortage of labour, we could count on such a shortage to lead to higher wages and thus encourage more people to enter the labour force: either from retirement, from education, from disability or from migration. However, data from around the world is suggesting that people are leaving the workforce. Further, over the last seventy years, there has been huge population booms in the west (literally, boomers!) huge increases in female workforce participation (women gained the choice to work, rather than being constrained to being at home!) and huge increases in migration from the global south.
These three key labour supply increases of the post-WW2 period are unlikely to be repeated in the short-term: we are obviously not having a baby boom, we cannot further increase female workforce participation very much more, and our migration system cannot take huge further movements because our housing systems cannot accommodate it.
Goods
The disruption to manufacturing through much of China, the disruption to shipping, the disruption to consumer (and business) preferences in the wake of the pandemic, and the surge in commodity prices last year have each combined to constrain the volume of goods available. In addition, this has been exacerbated by the huge levels of central government expenditure across much of the Western world, especially the very high-spending Trump/Biden and Johnson Governments, who have pumped many trillions of dollars/pounds into the economy. As a result, there has been significantly more demand for goods than capacity to supply those goods.
The Long-Term
As the excellent book Capitalism without Capital highlighted five years ago, we are generally moving to a world with a much higher level of intangible asset production and intangible asset investment. The recently-released Restarting the Future follow-up book makes very compelling arguments that traditional central bank invention to encourage investment are limited.
In short, because intangible assets are difficult to fund through debt, low central bank interest rates are insufficient to spark investment in those areas.
Combined with the increased morass of regulatory burdens that every business must face, we are imposing a very high hidden taxation rate on innovation, which are further encouraging economic concentration and consequentially economic stagnation.
Consequently, unless we can do something to limit economic concentration, and limit the massive expansion of the regulatory administrative state, I suspect that in the longer-term, we are about to enter a period of prolonged economic stagnation with very low economic growth rates of 2%, 1% or even lower, per annum.
I suspect that the economic growth rates of the 20st century will be unobtainable over the long-term, and unless we are able to reform our society, we will consign people to a poorer future.
Thus, although we will endure very high inflation in the short-term, in the long-term, our inflation levels are going to be chronically low due to low productivity gains. We could, of course, do many things to grow a more prosperous future: mostly around building more homes for humans and reducing the burden of regulatory compliance. But we won’t, because our modern political discourse is ruined by people trying to share the pie, rather than grow the pie.
