Back in January, six months and an eon ago, President Biden laid out a sanctions strategy to bring about “economically devastating” consequences should President Putin attack Ukraine. As a deterrent the policy clearly failed. Nor, so far, have sanctions in any way moderated Putin’s appetite for waging war – indeed they have had the opposite effect.
What Biden failed to spell out was “economically devastating” for whom. Putin is engaged in unsubtle, all-out economic warfare with the West. In the long-term his actions may be self-defeating, his own and Russia’s nemesis; that remains to be seen. But the potential consequences of his winning, the corollary of which is the West losing, with all the encouragement that would give to other pariah states, are unpalatable to say the least. In the near-term, however, the direct and collateral damage, politically and economically, is being wrought everywhere, seemingly more so to others than to Russia itself.
To those countries suffering drought and potential famine, particularly in the Horn of Africa and along the North African coastline, but in parts of Asia too, new food supplies from the Kremlin are a lifeline. Those governments are well aware of the potential for civil unrest among their starving populations as the threat to life becomes critical. Remember a food crisis in Tunisia was the original spark which ignited the tinderbox which exploded the 2012 Arab Spring rebellions; more recently, alongside fuel shortages, it has caused the collapse of the Sri Lankan government this month. Eritrea was one of the five countries to vote against the 2nd March UN resolution condemning Russia, while the two Sudans were among 35 (nearly half of whom were African) countries abstaining, and Ethiopia was absent. Egypt voted in favour of the resolution, but Putin has been active already in selling Russian wheat to Cairo in recent weeks. Economically from a Russian perspective, there is also benefit. Although Russian grain exports themselves are not subject to sanctions, the financial sanctions regime has meant that finding shipping and cargo insurance has been very difficult; under this deal, how could Putin still be refused insurance?
UK inflation (CPI) for June reached 9.4%, up from 9.1% in May. The RPI measure of inflation, used still in the setting of many regulated prices, now stands at 11.8% (with a sense of foreboding season ticket holders on the railways will be awaiting the July RPI figure on which the 2023 rail fares are set, based on RPI+X formula; will the government cap the increase at a lower rate to keep the punters on board, as in 2021?).
But to what extent do the official inflation data reflect one’s personal household inflation rate? Every household is different and it is almost guaranteed that 100% of households’ expenditure varies to at least some degree from the official list.
In the US, there is an unofficial annual inflation survey, the Chapwood Index. As the blurb on its website boasts, “The Chapwood Index reflects the true cost-of-living increase in America. Updated and released twice a year, it reports the unadjusted actual cost and price fluctuation of the top 500 items on which Americans spend their after-tax dollars in the 50 largest cities in the nation”. It has its detractors, seen by many economists as unscientific and inappropriate because of its lack of controls compared with the formal government figures.
Back in the pre-Covid days when headline inflation was reported often below the central banks’ 2% target rate, there was always the sneaking feeling that one’s own household inflation rate was outstripping what the government was telling us we were experiencing. In 2019 in the US, for example, Core PCE was averaging 1.7%; the Chapwood Index based on a simple arithmetic average recorded 9.6%, ranging from 5.5% in Mesa (Arizona) to 12.6% seen in Los Angeles and San Jose, both in California. The latest Chapwood data has just been released for 1H 2022: on the same basis, it weighs in at 15.4%, with the highest rate seen in Chicago at 18.8% (just pipping Fresno at 18.7), and the lowest being Minneapolis with 11.3%.
The criticisms of Chapwood’s crudeness are entirely fair, but they substantially miss the point. The point is not whether the data is accurate or not, it is that perception is as good as reality in the minds of the average voter. And if Mainstreet USA somehow has the impression that the wool is being pulled over its eyes, that reality (Chapwood) and officialdom (government inflation data) are a chasm apart, there tends to be a reaction. As real earnings fall, and more than a decade of central bank policy with its asset price inflation has exacerbated the economic gap further separating the “haves” and the ”have nots” leaving the latter even further behind, the effect is political polarisation. It leads to “populism”, both to the left and right, often turning long-established political habits and constituencies on their heads. That in turn creates instability, or at least throws up the increasing likelihood of surprising political outcomes.
However bizarre and contradictory from a monetary standpoint, and to the extent that it explodes the entire notion and principle of “monetary union”, there’s nothing so inventive as the ECB to cobble together strange strategies to keep what is a political construct more-or-less together. But if Putin gets his way, that inventiveness is likely to be tested to the limit, if not quite to destruction, over the next nine months should he decide to make the EU shiver and shut.
We might just have had a record-breaking heatwave, but at the risk of sounding like Eeyore, it’s going to be a long old winter.
The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.
The value of active minds – independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
Fund specific risks
The NURS Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. The Jupiter Merlin Conservative Portfolio can invest more than 35% of its value in securities issued or guaranteed by an EEA state. The Jupiter Merlin Income, Jupiter Merlin Balanced and Jupiter Merlin Conservative Portfolios’ expenses are charged to capital, which can reduce the potential for capital growth.