Conditions are In Place for an “Inflationary Depression”

By John Banks

Robert Skidelsky, an economic historian and member of the U.K. House of Lords, believes the conditions are in place for an “inflationary depression.”

On May 6, he told Bloomberg the following:

This is going to be a depression and an inflation at the same time, or an inflationary depression if you like, which is very, very unusual.

It’s a bit like what we had in the 1970s, when we had something called stagflation — high unemployment and inflation at the same time. Because supply has fallen, obviously, but demand hasn’t fallen nearly as much.  

In his analysis, Skidelsky was focused on the U.K. economy, where the British government has pledged to cover 80% of lost wages for millions of workers on furlough.

The Bank of England, meanwhile, has forecast the worst U.K. recession in more than three centuries. The last time Britain had a downturn this rough, the United States hadn’t yet been founded.

With that said, “inflationary depression” is a useful phrase globally. It applies to the U.S. outlook too, and much of the Western world. 

For many Americans, inflationary depression conditions are already here. Mass layoffs, for instance, have disproportionately hit workers on the lower rungs of the income ladder.

On May 13, Federal Reserve Chairman Jerome Powell noted that 40% of U.S. households earning less than $40,000 a year lost a job in March. The worst of the pain hit those who could least afford it.

In his remarks, Powell further urged Congress to provide “additional fiscal support” — i.e. more trillions in stimulus — noting that the U.S. is experiencing “the biggest shock our economy has felt in modern times” and that “avoidable household and business insolvencies can weigh on growth for years to come.”

The insolvencies are piling up. In multiple U.S. states, we are seeing food bank queues — the modern equivalent of the 1930s breadline — with lines of cars stretching longer than a mile in some cases.

With regard to inflationary depression conditions in the United States, the depression side of the equation is powered by mass unemployment, mass business closures, and mass cutbacks in consumer spending (with a newly urgent focus on paying down debt).

The inflationary side, meanwhile, will be driven by supply-chain breakage, COVID-related production cost increases, and persistent shortages of high-demand goods that Americans still want or need to buy, even as spending budgets are slashed to the bone elsewhere.

Nor is this a hypothetical. Inflationary price spikes, within a sea of deflationary data, are already here.

“Grocery prices showed their biggest monthly increase in nearly 50 years last month,” the Washington Post reports, “led by rising prices for meat and eggs.”

“The jump in food prices came in a month when more than 20 million Americans lost their jobs,” the Washington Post adds, “driving 1 in 5 households into food insecurity.”

Some of the country’s worst COVID-19 outbreaks are in meatpacking plants, a place where it is extremely hard, if not almost impossible, to practice social distancing.

As a result of outbreaks and fatalities, multiple meatpacking plants have shut down in recent weeks (with the White House later ordering some to reopen).

Nor is it just plants where food workers are vulnerable. They face significant infection risk at multiple points all along the chain, from pickers in the fields all the way to clerks and baggers in the stores.

Food shortages could persist while packing and processing plants are newly outfitted, or possibly even rebuilt, to protect workers from infection.

At the same time, a COVID-19 retooling process will have to play out in countless other areas related to harvesting, processing, transporting, and distributing — from farms and fields, to plants and trucks, and all the way out to delivery drivers and stores.

In addition to initial COVID-proofing costs — it will be very expensive to rework all this — overall food costs will be higher on a permanent production basis due to more line distance between workers, ongoing personal protective equipment (PPE) costs, added protection protocols slowing down line speeds, and so on.

Marginal efficiencies will be swapped out for protection, and costs will be passed on.

Beyond the food chain, a similar thing will have to happen in restaurants, retail stores, and any other type of consumer-facing business with physical foot traffic. Workers will need greater levels of day-to-day protection and stringent day-to-day safety protocols. COVID-updated health codes will require this.

As a result, social distancing rules will mean reduced occupancy and lower turnover for physical locations, even if demand comes back 100%. A restaurant or store that can only serve 40 customers an hour, due to safety protocols and distancing logistics, cannot do the same volume of business as one that serves 100. In this sense, there is no way to obtain the old “normal” at all.

Most physical-location businesses had tight margins in the first place, even before the pandemic. To make ends meet and turn a profit — the point of staying in business in the first place — their prices may have to go up to absorb pandemic-related costs.

We could then see a kind of last-man standing effect, where physical businesses that survive the pandemic see increased turnover simply because so many competitors have disappeared. They won’t have the same profit margins as before, due to a lower rate of turnover at full capacity, but they’ll have the ability to jack prices up to claw back lost revenues — and so they will.

Via the April spike in grocery prices — even as consumer prices overall saw their biggest single-month decline since 2008 — we are already getting an early taste of “inflationary depression” conditions.

These conditions could intensify, in part, due to supply chain retooling and health-code mandates, as just explained, and also due to knock-on inflationary pressures — not everywhere but in select places — via more trillions in government stimulus, which the Fed chairman is now openly calling for.

To sum up, COVID-proofing the U.S. economy is going to be an expensive necessity in a time when supply chains are already breaking, and those with money to spend (be it from their own pocket or the government’s) could be willing to bid prices sky high for what they want or need, even as mass unemployment and mass business failures combine to put the broader U.S. economy in 1930s mode.

We could also see a related “inflationary depression” phenomenon in the stock market, where a majority of stocks see revenues and profits contract and share prices fall (depression-style), even as a small handful of publicly traded companies see price expansion and multiple expansion (inflationary style) due to one-off niche positioning or a unique suite of competitive advantages.