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I WAS on my usual weekend hawker rounds in PJ last week, when an elegant lady approached me.I am so glad to see you at places where ordinary people gather – check out the prices: everything is up; not just among hawkers but also in wet markets, among fish-mongers & chicken sellers, as well as in supermarkets and street vendors.Why is there inflation when there is supposed to be none? Hence, today’s piece about the outlook on inflation. Inflation is bad
Inflation is badInflation as we know it is the rapid, continuing rise in prices, which arbitrarily takes wealth away from savers, and devalue the value of income earned.
It’s not just the purchasing power of money that is eroded; it is the trust in a reliable future on which promises and contracts in a capitalist society depend.
As I recall from the early 1970s to the 1980s, more than 50% of consumers regard inflation or the rising cost of living as the single biggest problem facing them.
However, by the 1990s, inflation seemed to have wanned; and didn’t resurface until the 2010s. Even though the post-financial crisis stimulative packages raise government debt prodigiously, and QE (quantitative easing – where trillions of new money are created) started to hit its stride.
The stage appeared to be set for prices to surge, yet they did not. In the 2010s, world inflation stayed stubbornly below 2% a year.
At its worst this spring, the threat of demand-sapping deflation loomed large, especially in the euro-area and Japan.
Pressure mounted for central banks to aim for inflation above the 2% target. With interest rates close to zero, it has become very hard for monetary policy to push inflation back up even to 2%.
I see three main factors at play: (1) the after-effects of the stimulus measures taken by governments to cope with the Covid-19 pandemic, (2) demographic shifts, and (3) changes in policymakers’ attitudes towards the economy.
Central-bank balance sheets in US, Britain, Japan and the Eurozone have risen by more than 20% of their combined GDP since the crises began, mostly to buy government debt.
This new money is paying for enormous stimulus programmes, including wage subsidies, furlough schemes and expanded welfare benefits that put money into pockets and purses.
As I see it, today, the private sector finds itself flush with cash as vaccinated economies reopen; households and firms may even go on a spending spree.
That can result in a lot of money chasing goods and services that might not be in ample supply, resulting in a brief period of inflation that would tail off.
Still, most investors think next year’s inflation is more likely to be below the 2% central banks target than above it.
I believe that the underlying driver of inflation is a combination of the public’s expectation of price rises (which is self-fulfilling) and the health of the labour market. Both currently point to low inflation even as US’s economy is expected to recover faster than most. Relatively high unemployment will give firms little incentive to increase people’s wages, and thus little need to raise prices. So, even if there is a spending boom, there will be plenty of economic slack around to accommodate it.