Inflation: Always and Everywhere a Social Phenomenon

There are currently at least two advantages to being a former academic sociologist in my early fifties: I'm just about old enough to remember the high and accelerating inflation of the mid 1970s, and I’m able to recognise the limitations of a purely economic theory of inflation.

Two things have prompted these musings on inflation. Firstly, encountering price increases on basic foodstuffs at one of the main discount supermarkets in the UK (500g bran flakes up from 46p to 49p, sardines from 31p to 35p), the daily reality of CPI inflation recorded at 5.5% in January 2022. See UK CPI data.

Secondly, reading a thoughtful essay on inflation, ‘The Perils of Yesterday’s Logic’, by Henry Maxey in the investment house Ruffer’s recently published Annual Review.

Maxey’s essay reminded me of Milton Friedman’s famous observation that “inflation is always and everywhere a monetary phenomenon”, (p181 in The Counter-Revolution in Monetary Theory).

Maxey also references a powerful intellectual counterargument to Friedman co-edited by couple of authors I read as an undergraduate, namely Fred Hirsch and John Goldthorpe’s 1978 collection of papers The Political Economy of Inflation.

The book was based on a 1977 conference at the University of Warwick where several non-economists brought wider social science insights to bear on a topic too important to be left to rival schools of economists.

Put simply, contra Friedman, inflation is always and everywhere a social phenomenon.

Maxey highlights Hirsch’s argument that inflation becomes pronounced when the status order of a society is in question: “containment of the latent distributional struggle without financial instability requires either sufficient authority or sufficient consensus, on the values or principles underlying the distribution of income and other aspects of welfare. If established authority weakens before a sufficient consensus or a new authority emerges, inflation results.” 

Who can doubt that the advanced economies of 2022 lack both authoritative leadership and widespread social consensus?

The level of prices, and their rate of growth depends on a complex ever-changing balance of forces on both the demand and supply sides of economic transactions, between producers and consumers, workers and employers, companies and regulators, politicians and electorates. This balance of forces is being profoundly disrupted in early 2022, with inflation one consequence (and itself a further source of disruption if persistent).

The acceleration or otherwise of inflation ultimately depends on the ability and willingness of people to pay for goods and services, and these are not simply determined by resource constraints, but are shaped by contestable definitions of social acceptability. Is it acceptable for companies to pass on cost increases? Will employees accept wage increases below the rate of inflation? Will consumers accept having to trade down as prices rise, or will they continue to accept higher prices to access favoured brands?

Hirsch’s notion of status order is well-chosen for it invokes Max Weber’s classic sociological definition of status as "the social estimation of honour".

Quantitative indicators such as the prices of goods and thereby the rate of inflation are the translation into numbers of social transactions where the numerical outcomes have processed through estimations of honour, decency and social and political acceptability. 

Prices embody both economic and social contracts.

The limits to inflation are set by how far people will tolerate the stretching of their definitions of what can be socially as well as financially afforded, and the extent to which what J.K. Galbraith termed ‘countervailing power’ can be mobilised and exerted against the pressures of rising prices.

This is why inflation is always and everywhere a social phenomenon.

In the meantime, I will enter supermarkets with renewed trepidation and reach for the few 1980s economic textbooks I didn’t throw out to remind me of ‘demand-pull’, ‘cost-push’, and other parts of the lost language of high inflation which are likely to prove useful in the days ahead.

The Start of a Twenty Year Investment 'Experiment'

Having turned 55 (and ‘retired’ from paid employment for some time) I will be taking my workplace pension later this month. As part of this package, a tax-free lump-sum is due, part of which will be spent on house refurbishment, the remainder invested.

A recent visit to an elderly relative in a retirement home brought home the need for me to have a large capital sum to draw down after I turn 75 to fund potential long-term care and health needs.

Recent investment experience, together with my eclectic outlook, has encouraged me to inflect this very long-term capital in the direction of the value style of investment.

My diverse (some would say incoherent) existing portfolio spans Chelverton UK Dividend and Edinburgh Worldwide, but arguably lacks both breadth and depth in its exposure to non-income paying investments in the value style.

The core of my portfolio will continue to be in dividend-paying shares and trusts/funds, but as I hope to live for another 30 years, I’m not abandoning long-term growth as an aspiration, but want to find growth in a value style.

The previous blog post highlighted the Palm Harbour Global Value Fund and the Kopernik Global All-Cap Fund as possible global value choices, and Asian value is to some extent covered by a long-standing holding in the Fidelity Asian Values trust. 

In completing this allocation to value investments in pursuit of growth (including a newly opened SIPP) the following funds have attracted my interest, and it’s notable that there’s a dearth of value-style investment trusts outside of equity income.

For UK Smaller Companies: The VT Teviot UK Smaller Companies fund has performed extremely well since launch despite the headwinds facing UK small cap value strategies: up 24% over 1 year to 1^st Feb 2022, in the sector top 5, along with other UK smaller value strategies, but unlike those Teviot was up 70% in the 3 years to 2022, in the sector top 5 with the leading growth-based UK smaller companies strategies over that longer time frame. 

One point to note: the fund charges a dilution levy of around 1% for purchases and sales - irritating, but I'm willing to pay it given my long time horizon.

For deep value: Arguably the deepest value, most contrarian UK All Companies fund or trust available is the Cape Wrath Focus Fund. 

After a rough 2019/early 2020 it performed strongly in 2021 and was the top performer in the IA UK All Companies sector in the 12 months to 1^st February 2022 (+35%).

For US small cap value: The VT De Lisle America Fund is one of very few actively managed small cap value funds, with its heavy weighting to US community banks perhaps well-placed given likely interest rate moves.

For Japanese value: The Nippon Active Value Fund is a London-listed investment trust and one of a genre of activist vehicles targeting many cash-rich Japanese companies as the corporate governance culture in Japan becomes more shareholder-friendly. In early 2022 it has so far avoided the heavy sell-off in Japanese smaller company growth trusts such as Shin Nippon and JP Morgan.

The start of the 20 year experiment

To start this two-decade long investment journey, and with a global value tracker, as well as two growth trusts I already hold, as comparisons, here below are the prices as of 02/02/2022 and latest available price-earnings ratios, from Morningstar [date of PE in brackets]

Health and technology permitting, I aim to track the progress of this ‘growth in the value style’ part of my portfolio regularly in these posts until I turn 75 in 2042.

Will 'value' outperform growth over the next two decades?

Palm Harbour Global Value Fund EUR 13.55 PE 7.01 [31^st Oct]

Kopernik Global All Cap AG £1.6855 PE 6.68 [31^st Dec]

De Lisle America B £5.7542 PE 9.07 [31^st Dec]

Cape Wrath Focus A £1.4591 PE 6.22 [31^st Jan]

Teviot UK Smaller Companies £1.8223 PE 10.48 [31^st Dec]

Nippon Active Value £1.31 PE 14.6 [31^st Dec from trust Factsheet]

Edinburgh Worldwide £2.305 PE 71.34 [31^st Oct]

Scottish Mortgage £11.055 PE 34.36 [31^st Oct]

XTrackers MSCI World Value Factor XDEV £29.13 PE 9.61 [31^st Dec]