Don't panic about inflation

by Ed Bowsher on 18 February 2010  |  1 comment
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The recession is a bigger threat.

This blog post by Ed Conway: Don't panic about inflation - that can wait is well worth a read. 

This is the bit I agree with 100%:

"This week's 3.5% inflation, and the likely increases in the next few months, are rather like the temporary price rises in 2008 (remember the inflation hysteria then?), in that they disguise the recessionary forces still hammering down on the economy. Households are suffering wage cuts, businesses are still incapable of borrowing, and the country is about to endure its biggest set tax rises and spending cuts in a generation. Now is not the time to panic about inflation."

I've omitted the final sentence in the paragraph which is this:

"That can wait for a couple of years."

I've broken that sentence from the rest of the paragraph because I'm not sure Conway is right on that point. Conway suggests that governments will resort to bouts of inflation to reduce the real value of their humungous debt. He cites suggestions that the government might even raise the Bank of England's inflation target to facilitate that process. But I'm not convinced. I think the markets are very aware of this issue and they would jump on any suggestion that governments were pursuing an inflation-based debt reduction strategy. So my view is that we don't have to panic about inflation now and we probably won't have to panic about inflation in 2012 either - although I'm not completely ruling it out. Given what we've been through over the last couple of years, it would be foolish to make 100% certain predictions for two years ahead.

Demographics

Conway also suggests that interest rates will inevitably rise over the next ten years due to demographics. In other words, as a great proportion of the population is retired, interest rates will rise as there will be less saving going on. This idea comes from the latest editon of the  Barclays Gilt Equity Study. I have a copy of the study and I plan to return to this issue in more detail some time soon.