Deglobalization has been one of the headline trends that analysts point to predicting higher inflation. The narrative follows that since 2018 and the imposition of key tariffs on Chinese imports by the Trump administration, global supply chains have retrenched. There has been a shift from ‘just in time’ to ‘just in case’ logistics, which is more expensive, and many industries have been moved out of countries like China which are viewed as hostile to the US and the West.
Thorne, however, cites a study from the Council on Foreign Relations which argues that what we’ve come to know as globalization has been far more of a regionalization story. The EU, Asia Pacific, Latin America and other key regional blocs have underpinned the shift in global production and consumption. Thorne says that these regional blocs have been less impacted by some of those bigger shifts. We simply fail to notice that in North America because we live in one of the few regions that has less rapidly adopted regional integration.
One of the key drivers of US and — to a lesser extent — Canadian inflation has been significant increase in government spending since the onset of the COVID-19 pandemic. The US debt to GDP ratio has risen to around 125 per cent. While neither presidential candidate is currently talking about deficits, Thorne believes that if there isn’t a significant pullback in debt levels by late 2025 or early 2026, credit markets will revolt and force the US into a ‘Liz Truss moment’ demolishing the value of the greenback and tanking US equities. Whether the next administration makes meaningful changes to spending levels, or credit markets force them to, Thorne sees that inflationary driver coming off, resulting in lower CPI increases.
Demographics are also cited as a key driver for inflation, with aging baby boomers in the developed world demanding more in the way of healthcare, driving healthcare costs higher. Thorne acknowledges that healthcare inflation may rest higher, but he emphasizes that the pressure baby boomers place on healthcare will likely be taken off demand for other goods and services. On aggregate, however, he sees the broad trends of global demographics as more deflationary.
Perhaps the most important part of Thorne’s inflation thesis is that rate hikes have actually served to drive up inflation in key areas. Shelter inflation in the US is now holding inflation rates higher. He sees interest rate increases in a society with such a high degree of leverage as inflationary, rather than deflationary.