“Capitalism inevitably and by virtue of the very logic of its civilization creates, educates and subsidizes a vested interest in social unrest.” ~ Joseph A. Schumpeter

Let’s start with a few ‘definitions’ to think about:

1. Rentier Capitalism, according to ChatGPT:

Rentier capitalism refers to an economic system where a significant portion of wealth and income is derived from owning or controlling access to assets, such as land, property, or financial instruments, rather than from productive economic activities like labour or entrepreneurship. In this system, individuals or entities extract economic rents — excess profits or income obtained beyond what would be necessary to keep an asset in its current use — by exploiting their ownership or control of scarce resources or assets.

2. Owner occupiers’ housing costs rental equivalence, according to the Office for National Statistics (ONS):

The owner occupiers’ housing costs rental equivalence approach uses the rent paid for an equivalent house as an estimate of the cost of housing services that are consumed. That is, we value housing services by looking at the cost of the next best alternative to home ownership, namely renting a property.

3. Greedflation, according to the Collins Dictionary:

Greedflation is an increase in the price of goods and services caused by businesses increasing their prices by more than their costs have risen.

Inflation has persisted at stubbornly high levels for much longer than many had expected. Whilst demand-side drivers have been robust, it has not been the cause. Rather, its persistence we believe can be attributed to the unintended consequences of higher interest rates and capitalism itself.

We discussed the concept of Rentier Capitalism in our latest quarterly here. In it we discussed how property and company owners exploit their assets, leading to increased rents and profit margins, exacerbating wealth inequality, particularly noticeable amid record-high property prices relative to incomes and record concentrations in equity ownership. We believe Rentier Capitalism is an unintended but inevitable outcome of a capitalist system in its purest form.

Higher interest rates have led to higher rental costs, despite our central bankers hoping for the opposite. The first charts below show housing inflation in the UK and US, hitting levels not seen in decades despite overall CPI data coming down. With housing affordability at extreme levels, it leaves income dependant individuals in society with no alternative but to accept higher rental costs.

The second chart shows the extreme contribution from corporate profits to higher prices immediately following the Covid-pandemic. Significant fiscal stimulus ended up in the wallets of property and equity owners, via higher rents and increased profit margins. Excellent c-suite management…or corporate greedflation? This trend will likely persist until the global economy goes into a recession.

This dynamic is sustainable as long as consumers have excess cash. The era of fiscal dominance is upon us. Our base case is not for inflation to remain sticky forever…but rather, we likely see extreme swings from outright deflation to double-digit inflation and it is this environment that we feel will be worth preparing for.

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