At the end of February 2023, the price of oil (WTI and Brent), Henry Hub and ICE natural gas, aluminum, copper, steel, corn, wheat, and the Baltic Dry Index are below the February 2022 levels.

The Supply Chain Index and the global supply-demand balance, published by Morgan Stanley, have declined to September 2022 levels. However, the latest inflation readings are hugely concerning.

Considering the previously mentioned prices of commodities and freight, if inflation were a “cost-push” phenomenon, it would have collapsed to 2% levels already. However, both headline and core inflation measures, from the Consumer Price Index (CPI) to Personal Consumer Expenditure Prices (PCE) show extremely elevated levels and rising core inflationary pressures.

The U.S. dollar enjoys the world reserve currency status due to numerous factors. Legal and investor security, an open and transparent market, as well as independent institutions with checks and balances that limit political power and strengthen the country’s currency in relative terms. No, a country does not have a world reserve currency due to military power. No one accepted the kopek when the Soviet Union ruled half the world. For a fiat currency to be a world reserve it needs to be widely accepted as unit of measure, method of payment and reserve of value.

The problem is that all the above may be under threat.

Inflationary Policies Are Destroying Wages

When we read about the U.S. economy, we often get wage growth as a signal of a strong labor market. It is hardly a strong market when the labor participation rate and the employment to population ratio are both below the February 2020 level and have been stagnant for months.

Additionally, the headline figure of 4.6% annualized wage growth is misleading, as it shows a nominal and average figure that disguises a much tougher environment. According to the Bureau of Labor Statistics, from December 2021 to December 2022, real average hourly earnings decreased 1.1 percent, seasonally adjusted.

There are many excuses often used to explain inflation. However, the fact is that there is no such thing as “cost push inflation” or “commodity inflation.” Inflation is not an increase in prices, it is the destruction of the purchasing power of the currency.

Cost-push inflation is more units of currency going to relatively scarce real assets. The same can be said about all other, from commodities to demand and my favourite, “supply chain disruption”. More units of currency going to the same goods and services.