Why We Should All Start Talking About ‘Whackflation’

Which type of inflation would you like to worry about today? ‘Deflation’ has become rather passé. ‘Hyperinflation’ seems a little, erm, hyperbolic. ‘Stagflation’ is popular at the moment, but also open to interpretation. Meanwhile ‘transitory’ strikes one as subpar when it comes to encompassing the surprisingly persistent pricing pressures that have confronted the world’s economies this year.

So here’s an alternative. I call it ‘whackflation.’

Whackflation is an oscillation between big booms and busts. It’s big price spikes followed by price falls. It’s the uncomfortable position in which we watch complex systems that have been given a big whack by the global pandemic try to stabilize themselves. It is ‘whack’ in the sense that it’s rather alarming to witness, but also in the sense that it conjures up images of ‘whac-a-mole’ as one supply shortage leads to another.

In many ways, it’s the monetary equivalent of the bullwhip effect that’s been bedeviling consumers who want to buy things and the producers which make them, in which small changes in consumer demand at one end of the supply chain can end up leading to big swings in production at the other end.

“We've made the systems more inelastic through this specialization process, and we've just given everything the most almighty whack,” explains Citigroup Inc. Global Strategist Matt King in an upcoming episode of the Odd Lots podcast. “And there are plenty of systems in physics that don't behave sensibly. Once you give them an almighty whack, they go into a completely different form of behavior. And once they do so they don't necessarily neatly settle down again.”

The global pandemic initially sparked a collapse in demand for goods, which led retailers to pull back on ordering and factories to reduce output. As consumer demand began recovering, retailers and factories struggled to meet it. Put simply, they didn’t expect the impact of the big whack to turn back just like that, and have been struggling to balance supply and demand ever since.

The result is the risk of an environment in which violent run-ups in prices can be followed by falls that are just as extreme. Take, for instance, recent price action in iron ore futures — which sank below $100 a ton in Singapore trading on Tuesday as China’s authorities continued their attempts to curb steel production in an effort to conserve energy.

Lumber futures, which presaged many of the recent supply shortages, are also in the process of normalizing, while China’s thermal coal prices have dropped to 878 yuan ($137) per ton from a peak of more than 1,900 yuan per ton. Extreme volatility in prices is a challenge for policymakers trying to smooth business cycles and control — or even forecast — broader inflation.