Former Plunge Protection Team Member Warns of a Price Inflation Shock

Merryn Somserset Webb talked to economist and former US presidential adviser Pippa Malmgren, who is  also the author of Signals: the breakdown of the social contract and the rise of geopolitics.  She says in many ways price inflation is already here, but that beyond this a price inflation shock was coming.

From the interview:

Merryn: Now, one of the things that you’re seeing signals for at the moment is inflation. At the moment everybody, almost everybody…

Pippa: Everybody.

Merryn: …bar perhaps you and me, is worried about deflation much more than inflation. In fact, every interviewee I’ve had on this sofa over the last few weeks has discussed deflation and almost nothing but deflation. But this is not the signal that you’re seeing?

Pippa: No, and I’m delighted to hear these odds, because with a trader hat on, when I hear the market is 99% in favour of only deflation, I’d like to take the opposite side of that trade, especially since we’re at a moment in history when every major, central bank is doing its level best to create inflation. And history tells us: usually at some point this succeeds.

But more than that, if we look around the world, there are extraordinary examples of inflation enfolding right before our eyes. Only in recent weeks Belarus has found the shop shelves stripped bare because the inflation hit very quickly. Russia’s about to hit about 17% inflation; Argentina’s at 23%. The next thing is, OK, the Federal Reserve says, “That’s not our problem”...

[I]s it really true we don’t have any inflation anywhere? I’m not sure that’s true, and even in industrialised economies, one of the most interesting signals we see is something I might call ‘biflation’ and ‘shrinkflation’.

Merryn: OK, now shrinkflation we have discussed, and I’ve written about it a bit in the magazine, and in particular last week, or a few weeks ago, I wrote in the magazine about the ‘Creme Egg Debacle’, whereby there are fewer Crème Eggs in a multi pack now than there used to be, and worse than that there’ less chocolate, and even worse than that the chocolate is of slightly lower quality, right?

Pippa: Indeed.

Merryn: Now, you could say that that was a symptom of a deflationary mind-set among consumers, ie: it’s not possible to raise the price of anything, so if you want to improve your margin, you have no choice but to cut back on the cost of the product itself. But you don’t see it like that; you see this as a sign of inflation.

Pippa: Well, I think it’s very much like what we saw in the 1970s, which is a pre-cursor to a price hike, is that a manufacturer will make the packaging the same size but put less inside, and we’ve surely seen that in many, many different ways... Merryn: OK. So Pippa tell me more about this idea of ‘biflation’.

Pippa: So it’s an interesting phenomenon where it feels to people, even in the US, the UK and outside of Europe, like everything that’s mandatory is going up in price, and everything that’s discretionary is going down. So your Apple iPad, that may be falling in price, but the cost of your rent, your fare on the subway, your school fees, your college books, healthcare; all the things you have to have, those prices are definitely rising.

And so a central bank says, “Well, one offsets the other”, but I have a real question about this: the Chinese have recently announced Foxconn – our biggest employer in China – that they’re building their first production facility in Pennsylvania, ie: it’s starting to be less expensive to produce in America than in China. Do we really think that these prices will keep falling?...So I think what’s fascinating is you can talk to bankers, investment bankers, policy makers and they’ll say, “There’s no inflation”. And then you go to their homes for a dinner party and the only thing they can discuss over dinner is the rising cost of living.