INFLATION THROUGH THE EYES OF BRIDGERTON
US inflation data for the month of November 2022 has been released. Actual year-over-year (YoY) Consumer Price Index (CPI) came in at 7.1% against an estimate of 7.3% and actual month-over-month (MoM) CPI was 0.1% against a forecast of 0.3%. YoY CPI for the month of October 2022 was 7.7% whilst its monthly equivalent was 0.4%. This deceleration in prices is an indicator the contractionary monetary policy the Fed has been implementing by increasing interest rates is serving its purpose.
So, what exactly is inflation and how does it come to be? I yield the floor to the acclaimed Netflix series, Bridgerton, from whence we see inflation in motion.
Season 1, Episode 1:
Duke of Hastings: ‘We could pretend to form an attachment. With you on my arm, the world will believe I’ve finally found my duchess. Every presumptuous mother in town will leave me alone, and every suitor will be looking at you. You must know men are always interested in a woman when they believe another, particularly a duke, to be interested as well.’
Daphne Bridgerton: ‘You presume Lady Whistledown…’
Duke of Hastings: ‘I presume she’ll deem us to be what we are. Me, unavailable. You… desirable.’
The next day, the Bridgerton household was abuzz with gentlemen callers bearing flowers and gifts and wearing their hearts on their sleeves. It was a comeback reminiscent of Tiger Woods in 2019.
See, upon her entrance into society at the beginning of the episode, Daphne had been dubbed the Diamond of the First Water. She was the season’s incomparable. She was of excellent pedigree having come from an eminent family that bestowed upon her a sizable dowry not to mention the fact that she had won the genetic lottery. For all intents and purposes, she was a perfect 10. She ticked all the boxes a woman of her time needed to not only secure a suitable match but also attract a bevy of potential suitors. Puzzling to many though, her house was anything but a hive of activity. It took chicanery to ward away less appealing attentions and catapult her back to the top of the marriage-market food chain. The next episode saw Daphne rise like a phoenix from the ashes. This happened because at one of the balls, she had danced more than a couple of times with the season’s most eligible bachelor. The laws of supply and demand dictate that scarcity drives value whilst abundance diminishes value. A newly-minted duke with a bountiful bequest, the Duke of Hastings had a Bruce-Wayne aura about him. As such, mothers were all too eager to fling their daughter(s) at him and said daughters, save for one, were anything but unwilling. Daphne Bridgerton’s nonchalant indifference bordering on disdain, a phenomenon the duke was not accustomed to, only served to further intrigue him.
Ladies and gentlemen, allow me to present to you the forces of demand and supply and their effects on inflation. Inflation, an invisible tax, occurs in an expansionary environment when there is increased money supply in the economy as more money is chasing after fewer goods and services. For this reason, if there is increased demand for these scarce goods and services, their prices will surge. It is a common misconception that inflation is caused by increased prices when in actual fact increased prices are incidental to inflation. Inflation is caused by increased money supply in the economy. Alluding to the Bridgerton example, no amount of supply side pressure – Daphne’s frequent walks in the park, her attendance of balls or even the bestowal of high praise by the queen sent potential suitors scurrying her way. It took demand side pressure (the attention of a duke) to raise her ‘value’. Daphne’s dance card was now filling up and the drawing room at her house was a cauldron of activity. The economy had effectively been stimulated. This boom in economy came with inflation as well. By dancing with Daphne, the Duke of Hastings had effectively upped the ante. The idea that she should continue entertaining the attentions of a mere baron (Lord Berbrooke) was at best bewildering and at worst unconscionable. Only a man of equal or higher stature could now be allowed into the cardroom to play a hand. Prince Friedrich of Prussia, by virtue of being Queen Charlotte’s nephew hence was at the apex of the peerage system, naturally proved equal to the task. In fact, he surpassed it. He was quite literally a royal flush. This, right here, essentially depicts inflation.
A government or central bank may have different ends to their creation of an expansionary economic environment. Most often than not, it is geared towards boosting business investments which in turn creates jobs which results in increased consumer spending. There, however, has to be real and tangible value created in the economy by these businesses whose engines have been revved up as money for money’s sake is both fleeting and destructive. Then and only then can the expansionary policies be curtailed. One of the levers that can be implemented in high inflationary environments is increasing interest rates. This contractionary monetary policy reduces money supply in the economy as fewer people have the capacity to absorb a higher cost of debt. As such, there is less money in circulation resulting in reduced business and consumer spending. This decreased demand for goods and services effectively lowers their prices.
In the Bridgerton example, the equivalent of increased interest rates was a proposal. Once betrothed, Daphne ideally ceased to be accessible to other suitors. As such, it was incumbent upon her to ensure real value, whether it was a suitable match or real love or both, was realized from the expansionary policy she and the duke so deftly enacted. Similarly, in a bid to keep businesses open and save livelihoods during the Covid-19 pandemic, the Fed stimulated the economy to a tune of USD 5 trillion. The contagion effect of this expansion was runaway inflation. Having averted the economic shutdown that would have resulted from this black-swan event, it is now implementing hawkish monetary policies to ease inflation and cool off the economy.