It is so refreshing when a high profile figure steps up to admit that they were wrong. US Treasury Secretary, Janet Yellen, has admitted that she had misjudged the threat posed by rising inflation.
She said she was wrong then about the path that inflation would take. Yellen said there have been unanticipated and large shocks to the economy that have boosted both energy and food prices.
She added that supply bottlenecks have affected the economy badly, and that at the time she didn’t fully understand. But now they do.
Knowing where the problems are is a start. The next step is trying to fix it. How do we go about fixing problems such as a shortage of energy and food, a major global manufacturing hub that insists on implementing a zero-COVID strategy, and supply chains that have shattered like a piece of broken glass.
The solution that the US Fed has chosen is the tried-and-tested interest-rate hikes. It knows that it is powerless to repair the supply side of the problem. But it can do lots to choke off demand by raising the cost of money.
Problem for the Fed is that there is a lot of surplus cash swirling around the global economy. Trying to drain off trillions of dollars would be tantamount to bailing out a leaking boat using just an eggcup. It can be done, theoretically. But it could take an awful long time.
The upshot is that squeezing inflation from the system could be a drawn out process. Any hopes of returning to an inflation rate of 2% anytime soon could be pie in the sky. Probably, a better option could be for the Fed to set a more realistic inflation target – one that is achievable.
As for us in the real world, putting our money to work in inflation-beating assets is our best option to stop our money from shrinking. Amusingly, one expert after another has been advising investors to look for companies with pricing power, as though it was something new.
A business with pricing power isn’t just for times like this, it is an important attribute for a business to have all of the time.
Warren Buffet once said: “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you’ve got a terrible business. I’ve been in both, and I know the difference“.
