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It is the economy stupid

Brace yourself. The world has just turned an important corner. Over the last couple of decades we have become used to prices being driven down by technology and greater efficiencies of production. Most of what we are buying today is considerably cheaper (at least in relative terms) than it was a few years ago. This is obvious in the case of many electronic products. You can pick up a decent TV today for just a few hundred pounds. Calculators are so cheap they almost give them away. Services also have come down in price. In the 1950s we spent a third of our income on food shopping. Today food shopping accounts for only around 10% of our income. The prices charged for market research, the product I peddled for many years, has similarly fallen manifold. These changes to the prices we pay are partly a result of technological advances and greater efficiencies in the way we work and produce things.

Inevitably there is a limit to the cost improvements that can be generated by greater efficiencies. There is also another factor to consider. We are changing the way we look at the world. There is only so much oil and gas in the ground. This is why we call such products “robber commodities”. The drive to produce more efficient sugar beet requires insecticides that kill bees. There is a limit to what we will tolerate in terms of affecting our environment. There is a limit to how low a wage we will accept for an hour’s work.

As a result of the greater efficiencies of the last two or three decades there has been very little inflation. This is surely going to change. Globalisation and efficient supply chains are not going to go away but we have seen how they can be disrupted by a container ship getting stuck in the Suez Canal. We have seen how a political dispute between America and China can lead to higher tariffs. We can sense that a growing fervour for nationalism is leading to calls to “buy local”.

The result is going to be inflation. Prices are going to rise first of all for those products that people really desire and that the rich can afford. Education is already expensive and will become even more so. Luxury holidays (when we are allowed to have them) will boom and sell out quickly. The price of bikes is already climbing steeply and will continue to do so. The raw materials that are used to make products are hitting all-time highs. If you are running a business, you will find that you can put your prices up 5 or 10% and get away with it. The problem is everyone is going to be at it. This means that there will be profits to be made in the short term by price increases. Inflation will ultimately push up prices for everything and we will be in trouble. It is what happened in the 1970s when oil prices tripled and rising costs led to a recession in 1974. What we have learned from business models and frameworks is that there are some things that are highly predictable. Inflation looks like one of them. Brace yourself.


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