Flares are back, should we be worried for the economy?
It’s starting to look a lot like flared jeans are back — again. We’ve been living in an era of skinny jeans since the global financial crisis.
At times they’ve been uncomfortably tight, certainly tighter than what I would call “the mid-point of my target range”.
On that basis, it’s probably good that things are getting roomier in the legging department.
It’s been so long since the relatively baggy days of the 1990s and early 2000s that many of us had started to think tight jeans were now embedded as a structural phenomenon.
Some will still argue this is still the case, pointing to various sporadic outbreaks of flared jeans being worn in fashion magazines, none of which have taken hold with the general public.
Regardless, even if you’re not yet feeling the full force of the trend, markets are already moving to stay ahead of the curve.
Check out the Hallensteins and Glassons autumn jeans collections if you don’t believe me.
This will be a worrying trend for those of us who remember the 1970s and the fashion excesses of that era.
It’s hard to argue with a stylish boot cut, or a bit more room in the crotch for that matter but, by the end of the 70s, disco had taken hold and trouser styles were out of control.
The backlash, when it came in the 1980s, was extreme with ramifications for an entire generation.
Okay, at this point astute readers may have realised I could also be talking about inflation here.
However, readers with teenage (or 20-something) children will probably recognise that thing about the jeans is quite real.
The cycle of trouser width is in fact turning again.
It’s been threatening for a while but is now taking hold as a mainstream retailers update their stock.
There’s an uncanny correlation between trouser fashion trends and inflation cycles. Causation seems less likely. But who knows, maybe there’s some deeper zeitgeist driving economics and fashion in tandem.
Last week I wrote about what’s been dubbed “the great reflation”.
It’s essentially the process of adjustment from a low inflation era to a higher, more normal inflation era.
The good news is that it means the economy is recovering. The bad news is that it means prices are rising and interest rates may need to rise to address that.
And that’s also bad news for share markets.
They have already started falling in the past month as investors anticipate rate moves, despite central banks saying they are still a long way off.
This week I spent two days watching economists debate inflation risk on a video livestream from the NZ Economics Forum at the University of Waikato.
They did it with a lot more graphs and a lot less reference to trousers.
The forum really highlighted how much uncertainty there is right now about the risks of a new inflationary cycles.
Economists are divided about whether the current spike in inflation will prove to be a short-term result of pandemic-related supply issues or something more persistent and troubling.
Reserve Bank Governor Adrian Orr has indicated that the central bank may be prepared to tolerate a looser approach to this current cycle — inflation cycle, that is (I’m not sure where he sits on trousers).
This is controversial, although it is in line with the thinking of most of the world’s central banks right now — including the one the matters, the US Federal Reserve.
It means we might see inflation head above the Reserve Bank’s midpoint target of 2 per cent this year with no corresponding response in official cash-rate moves.
Orr argues that by pushing back too early against inflation, we would be fighting the last war instead of the more pressing battle at hand.
That means on balance he still sees unemployment and recession as our biggest threat until he’s sure the pandemic damage has passed.
He’s determined to keep the economy moving, even at risk of inflating assets — like house prices.
He makes a strong case for looking after employment, the top priority in ensuring social stability.
But higher inflation will also mean higher prices for things like food and petrol.
It’s no good for the poorest in society, either.
Central bankers are always navigating between a rock and a hard place, but the pandemic is adding a whole new layer of uncertainty.
What sort of inflation cycle is this? Will central banks have to respond with higher rates sooner than they say?
To what extent can they afford to look through this cycle? And how dangerous will it be if they get that wrong?
For now, one thing we can all agree on is that cycling in flared trousers is extremely dangerous.
Sorry, it was a long week in lockdown.
What we should really try to agree on is the importance of not letting this debate entrench our positions.
No one is sure about this. Central banks and governments need to stay flexible and open to changing policy quickly as required.
I feel confident that we’re not heading back to the heady days of the 1970s any time soon.
We’ll see a new generation wearing their wide-legged jeans with contemporary style this year.
Hopefully we’ll see this generation of policy makers follow that trend.
Adrian Orr has indicated that the central bank may be prepared to tolerate a looser approach to this current cycle — inflation cycle, that is (I’m not sure where he sits on trousers).