Things won't just return to normal – that's not how inflation works

You might think that, if inflation is indeed “transitory”, we just need to wait and everything will return to “normal”. But this is a grave misunderstanding of how inflation works, says John Stepek.

RMT picket line
Inflation changes behaviour
(Image credit: © Avpics / Alamy)

Inflation is still the biggest topic in investment. To get an idea of what’s going on and where we might be going, let’s consider a stylised picture of the economy over the past two years or so. In 2020, coronavirus triggered a lockdown that stopped people from going out for a prolonged period. But governments stepped in to pay workers who would otherwise have lost their jobs. So consumers maintained their pre-pandemic buying power, but could only spend their money on “indoor” goods and services, such as exercise bikes and Netflix subscriptions. Demand for these spiked.

You might think the beneficiaries of this surge would have recognised it as temporary. But it seems not. Many appear to have either assumed the extra demand was permanent, or favoured a strategy of stocking up just in case. As a result, some companies now have too much inventory, or have been surprised when demand this year has fallen short of forecasts, and some may also have hired too many staff. But just as the “staying in” sector over-ordered based on a temporary surge in demand, so the “going out” sector has underinvested based on a total collapse in demand. That’s the fundamental reason for airport chaos right now, for example.

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John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.