Comments: Ghosts of past inflation come back to haunt us

Hello Dave, I fear you have been consistently underestimating inflation and oil prices over the last two years.

If our markets are doing well on a $70 dollar oil barrel then surely higher prices could be tolerated. The US hurricane season is just around the corner, not to mention the other geopolitical concerns.

As for inflation, it's far from over just yet. A large deflationary pressure is exerted via chinese imports. The chinese renminbi is effectively pegged to the US dollar. We just need the dollar to power up and chinese goods will inflate in price with corresponding higher UK inflation. Also, I wouldn't be suprised if the chinese announced further suprise renminbi adjustements.

The CPI conveniently misses out house prices, amongst other things. Houses largely comprise the greatest burden we bear in regards to out monthly outgoings. The montetarists among us have no doubt noticed the 3.5 trillion pound housing market which has tripled in the last 10 years. A 2 trillion pound increase in the green stuff and not even a mention in the CPI basket? NB. UK net worth is around 6 trillion.

You've mentioned previously that 'if you had a pound for every time that inflation was going to take off'. If this is the case, then I suggest you have not been an economist long enough.

Posted by Werewolves at May 21, 2006 02:20 PM

I'm not aware of anybody who accurately predicted two years ago what would happen to oil prices, though there are plenty who jumped onto the bandwagon once they had risen.

I'd take issue with you on inflation, which has not been significantly higher than I was expecting. I'm basing this, incidentally, on the retail prices index, which does include house prices (in the depreciation component) and yet has been generally well behaved. As for the China question - one day it will happen that its exports are no longer exerting a downward influence on inflation. But not, as I say in the piece, for a while yet.

The past 13 years of low inflation have given me plenty of opportunities to win bets on it, though I was around during the high-inflation era. However you measure it - RPI, GDP deflator, private consumption deflator or CPI - inflation has been low.

Posted by David Smith at May 21, 2006 05:13 PM

Werewolves, how could you? David's picture isn't that flattering is it? The grey hairs must be well hidden.

Of all the "-flations" there are David you're the first I've heard talking of stagflation! Ian Macleod invented stagflation (in every sense) didn't he? I was more thinking of deflation, which is probably the most damaging of the lot over a prolonged period with its effect on business confidence.

And talking of deflation, I think cheap money has made speculators myopic and the crunch will only truly set in when the Bank of Japan raises rates and throttles the currency carry trade. I think the BoJ's gainful employment as a kind of clearing bank for the currency market may be coming to an end.

As China's largest trading partner, Japan's also well positioned to gain considerably from the growth in Chinese exports, which will result in the same upward pressure on Japanese base rates and that all important carry trade.

Personally I don't think inflation is the real threat, because of the steady supply of cheap manufactured goods. I think the end of cheap money combined with massive trade deficits will have a much greater effect.

Oh yes, and haven't the Saudis been talking about settling up oil trades in Euros rather than USD recently? That would upset the applecart.

Posted by Paul Owen at May 21, 2006 05:32 PM


if you happen to spot this I'm really keen to know what you think about current concerns about M4, broad money supply. If I've read the figures right this expanded by something like 12% last year in the UK, 8% in the Eurozone and by a similar order in the US, 12% or so. I'm sure you can corect me if I've misremembered or misread the figures.

This expansion of broad money, above and beyond inflation or bank base rates is being highlighted by those commentators who suspect that Anglo Saxon governments are looking to get themselves out of a tight corner with rising levels of consumer debt and high asset prices by allowing the value of money to fall while avoiding price falls in absolute terms.

All very well unless you're a saver in which case you watch the value of your liquid assets wither as the value of paper money falls.

As I recall (and bearing in mind that I was rather small at the time) the property price collapse of the mid 70s was brought about by inflation - householders found their mortgages reduced to manageable amounts, house prices didn't fall in absolute terms but once inflation had been built in they did in real terms - but that of course avoided the whole negative equity trap. But one did read a lot of letters from little old ladies in Bexhill on Sea living on fixed incomes bemoaning their being condemned to poverty.

So, in short, if broad money is expanding at super inflationary rates are we in danger of seeing aspects of the 70s situation repeated? Are there different dangers involved? Or is it all tickety boo and we should all be happily counting on building society interest to see us through.

Posted by Jonathan at May 23, 2006 07:01 AM

Broad money has been a poor predictor of inflation but a pretty good predictor of what has happened to asset prices, notably property. There are some, notably Tim Congdon, who think the broad money growth we've seen - and are seeing - will lead to much higher general inflation. On the other hand, the broad monetarists have been saying that for years.

Posted by David Smith at May 23, 2006 01:40 PM