The spectre of inflation
is a horrible journalistic cliche.
Sooner or later, we are going to have to face up to inflation. Yet the Bank of England is hurriedly dropping its base rate because it can see inflation falling fast in the coming months, and if the inflation rate falls below zero the economy enters a period of deflation, which – according to the economic textbooks – is universally-bad. So who is right: me, a lowly blogger, or the great and the good on the Bank of England Monetary Policy Committee?
We both are: it’s just a matter of timing. First comes the fall in inflation, against which the Bank is attempting to defend by its interest rate cuts. This fall is an inevitable consequence of the burst of the bubble. The prices of assets and commodities peaked during the bubble, and consumer prices tend to lag these. The inflation I am talking about comes afterwards, as the effects of the big injections of liquidity into the global economy begin to be felt, and it may be quite a good thing when it does.
The money that the governments of the world are putting into the economy is intended to stimulate growth. Whether it does so or not will depend on lots of different factors; but not all of it will. Corruption and cock-ups are inevitable, some of the extra loot will go awol: it won’t stimulate growth. Governments will back companies which then go bankrupt; individuals will spend their tax credits on cocaine. It is this unproductive loot sloshing around in the economy which creates inflation. But, if it’s accompanied by any positive economic growth, it’ll be OK. Overall, when there’s positive economic growth, what people earn goes up faster than the prices of the stuff they spend their earnings on, all of which is fine if you are in work.
But not so good if you are a pensioner on a fixed income. And more and more of us are going to be; or at least, that’s the assumption. Personally, I think its time to ditch that assumption. Improved healthcare and improved lifespan mean that as we live longer, we should expect to work for longer. The economy will not be able to continue supporting the idleness of a growing cohort of fit sixty- and seventy-somethings. But as we grow older, we should manage our lives to make an income from a variety of investments as well as from our labour. This will be be the best strategy to deal with the inflation which is on its way.