Rising commodity prices could prove to be a ‘growth tax’

Sharply rising commodity prices could limit economic potential, says portfolio manager Jack McIntyre of Brandywine Global Investment Management.

Speaking on the Soundbites podcast this week, McIntyre said consumers who have to pay more for basic necessities may defer the kind of discretionary purchases that stimulate economic growth.

“That’s a growth tax,” he said. “ I can’t spend as much on goods and services — going out for dinners, entertainment, for buying things — because I’ve got to allocate more of my disposable income for energy and food. That hurts economic growth.”

It also feeds into an inflationary loop, he said. “You’re hearing the word ‘stagflation’ a little bit more frequently right now, and that’s probably warranted.”

McIntyre pins the blame for the current round of inflation on well-meaning governments who fought Covid hardships with stimulus money. Those actions essentially turned the pandemic from a type of natural disaster from which the world economy could quickly bounce back into a more complicated, longer-lasting financial concern.

“I think the seeds of inflation were planted by policy-makers and central banks in response to the pandemic,” he said. “We were going into a man-made depression and they were trying to offset that. I think their view was that there was not enough stimulus and response to the [2008 financial crisis] and they didn’t want to repeat that mistake.”

Two years of ambitious fiscal and monetary support (“firing with both barrels,” as McIntyre calls it) has created a situation that is difficult to normalize. And the war in eastern Europe means there will be another round of government spending around the world — this time for defence.

“I don’t want to say inflation is getting out of hand, but the days of disinflation are certainly behind us for now,” McIntyre said.

Goods inflation was largely driven by supply chain issues and pent-up consumer demand, both of which have largely run their course. That means goods inflation will be easier to tame than service-sector inflation, which is more labour intensive.

“Services inflation should be more sticky,” he said. “So, this is where I think the rate hikes might have a more meaningful impact — [in] quelling inflation in the service sector.”

In battling inflation, McIntyre predicted the U.S. Federal Reserve would continue to be cautious.

“One of the things that this Federal Reserve likes is its flexibility. They don’t want to be locked in. And I think it’s the right course,” he said. “Go by 25 basis points — that’s what the market has sort of has priced in right now. And if warranted, they can speed up. They can go by 50 basis points. But you don’t want to surprise the market right now.”

The trick will be reading the economy carefully, he said.

“As long as there is what I call organic growth, economic activity, then that’s fine because that’s ultimately what drives a lot of equity markets, profit cycles, et cetera,” he explained. “But if you get a combination of the economy slowing down and the Fed still tightening, and overtightening, that’s where markets tend to get a little upset.”

McIntyre said the Fed will eventually turn its attention to its own balance sheet — a logical progression in dealing with persistent inflation. “The Fed has shifted their tune accordingly, going from sort of tapering at a slow pace to accelerating the pace of tapering, to raising rates, to eventually shrinking the size of the balance sheet.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.