Economist Pippa Malmgren identifies signals of disguised inflation – The Australian Financial Review

Pippa Malmgren: "Wherever you go in the world, everyone's totally obsessed with the rising cost of living."

To casual readers, the cover of the June 2009 edition of British Vogue, featuring supermodel Natalia Vodianova in the nude, was a little unusual and perhaps a bit daring.

To London-based economist and entrepreneur Pippa Malmgren, however, the magazine's departure from its usual celebration of haute couture was a sign that the fashion industry had lost a large slice of its consumer base.

These were "the young who were receiving unsolicited credit cards with large borrowing balances in the mail", writes Malmgren in the first chapter of her just-launched book, Signals.

The rest, as they say, is history. The shockwaves of a financial crisis that started in Wall Street rolled out across Main Street, taking with them businesses, jobs, confidence and spending power.

"Once the financial crisis hit, the fashion industry became aware that it had no idea who its new customers would be," says Malmgren.

In Sydney to promote Signals, the former adviser to Barack Obama and one-time deputy head of global strategy at UBS says the fiscal pump-priming and extreme monetary easing employed by governments and central banks to refloat the global economy seem to have worked.

And while growth remains sluggish and inflation slow to take hold, there are signs things are gradually returning to, if not a pre-GFC type of normal, a "new" normal with its own set of economic characteristics and signals.

One of those is disguised inflation.

"All the professional data everywhere you go says there's no inflation at all," says Malmgren.

"But wherever you go in the world, everyone's totally obsessed with the rising cost of living.

"Young people can't afford to buy a home anymore; people's rent is going up to the point where the kids boomerang back into the parental home; rail fares; grocery bills; the list goes on," she says.

Malmgren has identified "shrinkflation" where the price of an item remains the same but the weight or size is reduced as a type of disguised inflation that is straining household budgets.

Another statistical distortion can be found in hedonic pricing, where, for example, the computing power of a tablet can double over a couple of years, but the price rises only a little, if at all.

In the same way, chemically-treated fresh fruit can often have such a long shelf-life that external price pressures from rising energy and labour costs pass it by.

"Hedonics can make it look like prices are falling, but we often only include the items that are falling and we are ignoring the ones that go up," says Malmgren.

And while she concedes that fears in recent years of disinflation becoming deflation were well-founded, this also means that households have become ultra-sensitive to even the slightest rise in consumer prices. Heavy government and personal debt, added to greater human longevity, also means less relative spending on social services and tighter budgets in retirement.

All of this along with technological disruption to job markets helps explain the rise of populist politics across the West, she says.

The return of inflationary pressures also goes some way to explaining why China, the world's second largest economy and most populous, is stepping up its drive to secure food and energy sources across the globe, with the much-touted "One Belt, One Road" infrastructure push at the heart of this.

"The Chinese view is that the West is going to default on the debt owed to it, because don't forget that it financed our overspending," says Malmgren.

"Beijing says: 'You will default via inflation, which is why interest rates were lowered so much and cash was thrown at the economy'.

"It says: 'You will pay me back, but that money will buy me a smaller stake in that Beijing restaurant that I wanted to invest in than it would have a few years ago.'"

Indeed, Malmgren attributes much of China's modern expansion mainly the One Belt One Road program and island-building in the disputed South China Sea to Beijing's concerns about rising food and energy costs, and its determination to secure new export and import markets.

Surging wages and costs mean the country has also priced itself out of many of the manufacturing industries it dominated in the 1980s and 1990s, to the point where it is often now more economical with quality control and access to consumer markets taken into account to make electronic components in Mexico or the United States.

This, too, is weighing on China's strategic, long-term thinking.

Malmgren goes further to suggest that the resurgence of old geopolitical tensions, and emergence of new ones, is behind a revival in defence spending, particularly by global powers such as the US, China and Russia. She calls this "the new quantitative easing".

"The new way governments are pumping money into the economy is via defence spending," she says.

"This is why the weakness of the world economy actually converted the peace dividend [from the end of the Cold War] into a conflict premium," she says.

"It's a grab for resources that's all it is.

"This grab always existed, but it has intensified because of the debt problem and the return of inflation.

"What is in the South China Sea? Ten per cent of the world's fish supplies," she says.

So faced with rising inflation, renewed geopolitical unease, the spread of populism and massive disruption to traditional labour markets, what is today's fashion telling us about the future?

"Transparent jeans," says Malmgren, "I think are a cry for transparency, a reminder that the emperor is not wearing clothes.

"In fact, it's all a bit like that cover of Vogue."

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Economist Pippa Malmgren identifies signals of disguised inflation - The Australian Financial Review