Macroscope | Inflation is back but not interest rates
We could be on the cusp of a new era where inflation rises almost unfettered – and there’s little we can do to apply the brakes
How short memories are – even the central banks have forgotten the 1980s when inflation was Public Enemy No 1. Since then inflation has had more comebacks than Frank Sinatra – but is still mysteriously subdued. Is this the year when it rears its ugly head?
Post-war politicians and economists were consumed by worry that inflation would destroy their paper money. The greenback was backed by gold and the German Bundesbank ruled its money with an iron hand as its leaders remembered the wealth of two generations before them had been destroyed by hyperinflation. The sheer horror of the memory of their family’s hard-earned cash melting away in the heat of rampant inflation, as confidence in paper money was lost, kept monetary authorities responsible for two or more generations.
The new generation is unable to comprehend the dangers. Certainly, the ravages of inflation have been recently seen in countries like Venezuela or Zimbabwe, but those nations, rich in mineral wealth, were bankrupted by their incompetent politicians who printed money. Surely you can’t compare us to them?
In the 1980s, policymakers realised that they could defeat inflation by keeping money expensive through high interest rates – as high as it took. My mortgage rate rose to almost 20 per cent per year, fine if I kept my job but if I had fallen off the roller coaster, I was in trouble.
Since then, thanks to the occasional recession, stubbornly high unemployment, stubbornly low pay rises, and milky economic growth, inflation has steadily fallen. Rising productivity (also poorly measured) from workers being replaced by machines, and the emergence of China as the world’s low cost manufacturing centre also helped. Policymakers figured that in order to move away from boom and bust cycles that had plagued economies roughly every seven years, they would lower interest rates every time there was a bust. The problem is that they have not had the guts to raise them again – so we remain in a world of easy money and ripe conditions for sudden inflation.
