Linked to Pete’s forthcoming Economics Research Council journal article on replacing the inflation target, He has also published a guest blog post on the Daily Mail’s This is Money website:
Category Archives: Press coverage
The paperback version of Inflation Matters is now available from Amazon and other retailers priced £9.99.
Read Pete Comley’s opinion piece in MoneyWeek 7 August 2015 about why we are heading for a century of near-zero inflation. It shows that demographic changes might be coming to the world (and especially Africa) far faster that official predictions expect. The cause for the drop in fertility: television and so called “novella effect”.
Read full article either in MoneyWeek or below.
This year, Britain fell into deflation – according to the official data – for the first time in 55 years. Many have dismissed this as a temporary blip. Bank of England governor Mark Carney even thinks we’ll be back above the 2% target within two years. He might be right. But I suspect we won’t have to wait another 55 years for the UK to see deflation again. Although central bankers are trying to fuel inflation with low interest rates and money printing (quantitative easing – QE), they are pitted against many hugely deflationary forces: the ongoing impact of the financial crisis, competitive devaluations, the slowdown in China, and even the continuing internet revolution.
The demographic timebomb
However the biggest deflationary factor is demographics. The birth rate is below replacement levels in almost every developed economy, and is plummeting in most emerging ones. For example, in Bangladesh the birth rate has fallen from six children per woman in the 1980s to around two. Even in Africa, where the birth rate remains above replacement levels, I suspect official projections underestimate the decline we may see in the coming decades. Why? Research suggests that what has lowered the birth rate most is access to television (La Ferrra et al, 2008). Academics debate whether this is due to women’s attitudes changing as they gain more knowledge of their options, or if it’s simply because people have something else to do in the evenings. Whatever the case, at some point widespread TV will come to Africa and, with it, populations are likely to fall as they have elsewhere. We have yet to appreciate the scale of this demographic timebomb. We are all living longer, so total populations are still rising in most countries. However, Deutsche Bank recently predicted that the global population might peak as early as in 2050. In most developed countries, it will come sooner than that.
This will have a major economic impact. There will be fewer people around, and on average they will also be older. In the UK, the average household headed by those aged 75 or over spends £267 a week – less than half the spending of a household in the 30-49 bracket. Fewer people, spending less, adds up to a double whammy for global demand. This demographically-driven decline in demand fits well with a long-term perspective on prices. In fact, if history repeats itself, we may soon see prices stabilise for the rest of the 21st century.
We have estimates of inflation in the UK, based on the price of country houses in the south of England, going back to the 13th century (see the chart). This shows that, over the very long-term, prices have risen, but not in a straight line – they exhibit a wave-like pattern. My research suggests that typically, the UK has seen rising prices for a hundred or so years (the blue sections on the chart), followed by a consolidation period of stable, or slightly declining prices. Each inflationary wave and consolidation has been triggered by different circumstances – famine, disease, war or revolution. However, the net effect has been the same – to influence core demand through demographic changes.
Inflation in the 16th century
For example, the end of the War of the Roses in 1485 sowed the seeds that was to create inflation in the 16th and early 17th centuries. Peace returned to England, and the population grew from around 2.2m in 1500 to 5.2m by 1650. That put huge pressure on resources – prices rose nearly tenfold. Then came the English Civil War of 1642-51, in which an estimated 200,000 people died. Within a few years, prices had dropped by more than a third. The population did not start growing again, until well into the 18th century. Prices in 1750 were close to their 1655 low, despite various fluctuations in the intervening century.
The current inflationary wave started in around 1900. Since then, the global population has risen fourfold, from 1.6bn to around 7bn, again putting enormous pressure on resources. Judging by the rough length of previous waves, a turning point will likely come in the next decade or so. In fact, had it not been for central bankers’ money creation efforts, the world might well have transitioned into the consolidation phase after the 2008 recession. For us to now switch into full-blown deflation, some key conditions must be met. Firstly, debts need to be made more sustainable, either through default or restructuring. Without this, the pressure on governments to create inflation to relieve them will remain. Secondly, the excessive money creation of the last few decades needs to be resolved. Asset prices have risen far more rapidly than consumer prices. This has created ‘latent inflation’ in the system. Either the prices of goods and services have to rise to catch up, or more likely, asset prices will have to fall. Thirdly, there needs to be a credible system to control future money supply growth to ensure it does not create inflation again.
A deflationary shock
It’s impossible to predict what will bring these factors into alignment and precisely when. However, one candidate that has the power to create a massive deflationary shock is a major sovereign bond crisis. This would ensure that debts are restructured or defaulted upon, asset prices would crash resolving latent inflation, and it would likely result in demands to change the monetary system. Indeed a radical reformation, called the Chicago Plan, was proposed in the aftermath of the 1930s crisis (though never implemented).
No matter what causes the world to switch into long-term deflation, it is going to be a difficult time for investors (holding at least part of your portfolio in cash and gold seems wise). But it should still be possible to make money from income-producing assets in the aftermath. After the transition, the following mild deflation is not going to be harmful. Real (after-inflation) wages may also rise for the rest of the century, partly due to deflation but also due to the pool of skilled workers shrinking as the working population declines. Indeed inequality will probably decrease as a result, as it has done historically during this phase. This may well also resolve some of the social issues that theorists such a Piketty have been so concerned about.
Having attended Pete’s talk at the Economics Research Council, Michael Baxter of the Share Centre has posted two blog entries.
The first examines the Great Demographic Shock that will come about for inflation as a result of the declining birth rates around the world.
The birth rate is below replacement levels in pretty much every developed market and has been plummeting in most emerging ones including South America and nearly all SE Asia. For example in Bangladesh birth rate has declined from 6 children per woman in the 1980s to the current level of around 2.
Only in parts of Africa is the birth rate above replacement levels. Even here, I suspect the official projections are under-estimating the decline that we may witness in the coming decades. Recent research suggests that what has lowered the birth rate most is access to TV. Academics argue whether this reduction is caused by changing women’s attitudes (the so called “novella effect”) or just that people then have something else to do in the evenings. But be sure that at some point widespread TV will come to Africa (possibly wirelessly) and with it populations will probably decline as they have done elsewhere in the world.
The second picks up, Pete’s analysis on money supply vs prices since 1900 in the UK. This implies that price have to double from here or the money supply shrink in half to satisfy the basic theory of exchange. The key chart is:
You can read more about the analysis here.
Pete’s view is that the most likely scenario to resolve this imbalance is some form of deflationary shock caused by something like a sovereign bond market crash. You can read more about this in Chapter 18 of Inflation Matters.
Pete Comley appeared with David Jones on BBC 5 Live’s Wake Up To Money programme on 19 May 2015 to discuss the inflation figures due out later that day. Pete’s expectation of the UK dropping into deflation were confirmed later in the day.
You can hear the programme here.
The Economics Research Council published a detailed review of Inflation Matters book in their quarterly B&O Journal (Spring 2015, Vol 45, No 1.)
This easily readable book (it is mercifully free from equations, jargon and excessive references) serves two purposes. The first is to describe and explain the concepts involved and the implications of inflation at various levels. It answers the textbook need for a clear and straightforward grasp of the subject. The second purpose is to derive a very long term pattern of cycles which, being likely to continue into the future, may assist in prediction and thus in making investment decisions. If a book is to enable one to assemble a body of knowledge constructively and systematically and if one hopes in the process to be stimulated into new thoughts, then “Inflation Matters” is not only well worth reading but a book that amply justifies its title.
Every week Greg Opie of the Economics Research Council publishes an interesting Chart of the Week. This week it covers Pete Comley’s analysis of 750 years of UK inflation:
You can read more about the reasons for the pattern and Inflationary Wave Theory here.
Greg and Pete then discussed the chart with Simon Rose of Share Radio that evening. You can hear their full discussion here.