Inflation isn’t getting better anytime soon, especially in Europe


Peter Zeihan

Geopolitical Strategist
Archive |

Inflation continues to grow at record levels. The newest data from the Labor Department shows the Consumer Price Index (CPI) at 9.1% for June, another 40-year high. What’s behind the continuing surge in inflation? Rising costs for essentials like food and rent are playing a key part. So is the summer travel boom. It’s so bad that some airports in Europe have asked airlines to stop selling tickets for overseas travel for the rest of the summer because they can’t keep up with demand. Declining gas prices are an encouraging sign but Straight Arrow News contributor Peter Zeihan warns that inflation isn’t going to get better anytime soon, especially for Europe.

Excerpted from Peter’s July 14 “Zeihan on Geopolitics” newsletter:

Inflation in the United States has reached a four-decade high, according to data released by the U.S. Labor Department July 13. Gasoline costs are leading the pack of consumer goods facing rising prices, but it’s a good mix of everything. Which makes sense, given how many supply chain dislocations across the globe.Fuels, fertilizers, foods, industrial inputs–most of these were still in a state of flux even before one factors in China’s Zero Covid lockdowns. And the Russian invasion of Ukraine. And mass Boomer retirement. In fact, as we’ve been telling clients for months now, inflation has few places to go but up. Furthermore, the traditional tools at central banks’ disposal to tackle inflation are unlikely to have the same impact that they might once have had.So what does that mean for the future? Well, for one: inflation is anything but transitory. And any relief is not going to come in weeks or months for much of the world, but in years. At least the parts of the world that will see any relief. And then there’s the United States. We’re in a tough spot to be sure, but thankfully the fundamentals of the American economic system remain sound. Which is not to diminish the increased costs at the pump or the grocery store, but as Americans have shown for the last several months these are costs that the consumer can keep up with–demand remains strong, especially for non-essentials: flights, restaurants, and screenings of the new Minions movie are all apparently quite full.

Hi Everyone, Peter Zeihan here coming to you from Colorado. Today, we’re gonna talk a little bit about inflation. It is July 13 and, what’s the best way to put this? Well, the new data that came out of the United States government is not great. It suggests that the inflation rate within the American system is about 9.1%, which is easily a 40 year high. And if you look at most of the things that are going on with the markets and with jobs and with energy and with food, it’s going to be going up. So let me just kind of knock down all of those real quick so you see where we’re coming from. 

We’re looking at fertilizer limitations on a global scale. The Chinese have restricted the export of phosphate because they need it for rice. The Russians are discovering it’s harder to get their potash out because of the shutdown of a rail or partial shutdown of a rail line that goes through Belarus and into Lithuania on the way to the port of Kaliningrad.

And because natural gas prices are so high, a lot of companies, particularly in Europe, have just stopped making nitrogen-type fertilizers at all. So we’ve got price pressures in all three. In addition, the world’s number one wheat exporter – that would be Russia – has invaded the world’s number four wheat exporter, which would be Ukraine, and is systematically destroying all civilian infrastructure. It comes across with a double emphasis on agricultural infrastructure. So we have already lost one of the world’s great agricultural powers and probably before the end of the year, Ukraine will devolve into a net importer for at least several years. 

On top of that, the Baby Boomers are moving into retirement and the replacement generation that is taking their jobs are known as the Zoomers. Well, the Baby Boomers are the largest generation we’ve ever had and the Zoomers are the smallest. In calendar year 2022, that is already a shortage of 400,000 workers. That number is going to increase each and every year until at least 2034, where it will probably peak at around 900,000 shortage. Oh…deer!

Anyhow. None of these pressures are what you would call transitory. And they are in addition to the fact that the U.S. consumer has about $2 trillion of spare cash still saved up from the aftermath of COVID. And so we’re not seeing meaningful reductions in retail sales or general consumption. In fact, with us now midsummer people are traveling as much as they possibly can, which is putting more pressure on everything. The only way to get inflation under control…well, you’ve got two options. Number one, you can suppress demand. Or number two, you can increase supply. And there’s really little reason to expect either of those to happen in the next several weeks. So we should expect the data for at least August and September to be as bad, if not worse. 

This is not going to get better anytime soon. And as frustrating as that is, it’s so much worse everywhere else. Now, the United States may have a slightly damaged demography. The whole Boomer versus Zoomer problem. But America’s Baby Boomers did something that most of their equivalent cohort around the world did not do; they had kids. And so say what you will about the Millennials and there’s so, so very much we can say about the Millennials, they’re here. They’re spending now, they’re gonna be investing in a few years, and that gives the United States a ballast demographically and economically that most countries in the world don’t have. Now, why does that matter for inflation? Well, it means that the U.S. Federal Reserve still has a consumption profile that it can regulate with interest rates. So the Fed is likely to do another sharp rate increase very soon and at least one or two more before the end of the year. Because the American system has consumption, we have a tool that is still appropriate to the situation. Europeans don’t. The Europeans don’t have much of a millennial generation. So if they were to raise interest rates, it really wouldn’t have any impact on consumption. So if they raise rates at all, they’re gonna be going more slowly and in lower increments. And that is widening the differential between rates in the United States versus rates in Europe, which is pushing the Euro through the floor. Just today, the same day that the inflation data came out, the Euro officially dropped below parity. something that it hasn’t done in 20 years. And while there’s always all kinds of fun and crazy stuff that happens with currency trades, on the whole we shouldn’t expect it to ever recover. There’s no consumption. Interest rates are not an appropriate tool. You should expect capital costs in Europe to steadily rise at the same time that in the United States, there’s a greater return on any sort of investment. That tells me whether, whether you’re looking at food or energy or labor, North America’s in a better position.

And so North America is gonna be the safer investment bet. And we just have this massive flow of capital across the Atlantic. That makes inflation in Europe even worse because oil is dollar denominated. Natural gas is dollar denominated. Food is for the most part, dollar denominated. So is fertilizer. So is iron ore, so is Bauxite. So are most of the commodities and most of the finished metals, and now the Europeans are not simply dealing with less consumption and less economic activity and more exposure to Russia; they’re also dealing with an environment of currency weakness. So everything that they need to make modern society work has to be imported in someone else’s currency. And that currency is going through the roof. So yes, inflation in North America, it’s bad, it’s probably gonna get worse. Nothing compared to what the Europeans are wrestling with. Okay. That’s it for me until next time.



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