Inflation is so last year - Temple Melville

Few things are certain in life besides, as they say, death and taxes, but economics is one of the few that is reliable and predictable. That is why I can say, with a great deal of confidence, that inflation is already over.

Temple Melville, Fellow of the Royal Economics Society and CEO of The Scotcoin Project CIC

Isn’t inflation predicted to exceed 10% this summer, I hear you ask. Yes, it is. However, I would argue by this time next year we will be wondering what all the fuss was about.

Let me explain. Economics says that shortages equal rising prices. The opposite is just as true: glut equals falling prices. And, by the very nature of human beings, something going up in price makes them wonder how they can profit. Simple: grow more, make more, dig up more and sell it.

The problem, of course, is that this increases the supply and, as we know, supply expands to meet demand. Unfortunately, higher prices then lead to a drop in demand. The machine goes into reverse, the price falls to enable the market to be cleared, but soon enough demand and supply are back in equilibrium.

Over the last few weeks, the commodity markets have started to fall as various factors have played out – shrinking demand because of higher prices, which leads to less activity, less panic and more reality kicking in.

For all the hysteria about food shortages, wheat prices have recently fallen some 25%. Less economic activity usually means less demand for oil – now down nearly 30% from its highs – and the two most traded industrial products, copper and nickel, have seen prices decrease around the same amount.

All of these factors will already have had a knock-on effect, lowering inflation quite quickly but not yet showing in surveys and economic indicators. But the most important thing that has happened is the various monetary authorities reining in their expansionary policies – in other words, curbing the injection of money into the financial system that has characterised the last decade.

The money supply has returned to its normal long-term average of around 4% growth, down from 15-20%. As long as that is adhered to – as Germany did in the 1960s for many years at 2% – we may not even see a recession, as economic forces get to work on other markets.

Despite the present position, I don’t expect house prices to keep rising. Arguably they have already stopped, as apart from anything else banks have reportedly instructed surveyors to lower valuations for mortgage purposes. Anecdotal evidence suggests they are insisting on effectively an extra 10%-15% cushion for lending.

While our current direction of travel may suggest otherwise, be assured, interest rates will be dropping next year at the very least. Further still, I believe the foundations for the next upswing are already in place and, all things being equal, will make for a smoother 2023.

Temple Melville, Fellow of the Royal Economics Society and CEO of The Scotcoin Project CIC