Economist magazine advocating inflation

In the Economist of 9th November 2013, the lead article is strongly advocating increasing world inflation, ie

‘The biggest problem facing the rich world’s central banks today is that inflation is too low.’

It even goes as far as suggesting that inflation targets should be set at 4%.

Economist 1

In response, Pete Comley has written the following response which the Economist published part of in the 23rd November edition. (Listen to audio version?)

Sir,

I disagree strongly with your conclusion that the world’s biggest problem is low inflation (“The perils of falling inflation”, 9th November 2013).  Low inflation, or even deflation, is not always depressing as you suggest. During the Victorian period from 1840-1900, prices declined by 17% in the UK. During that time, real GDP increased from £45bn to £147bn. The concept of always pursuing positive inflation was only enacted in major economies after World War II. Prior to that, prices went up and down. Since 1945 when central banks started to be tasked to create inflation, prices have always gone up – over thirty times in the UK for example.

Moreover the article doers not distinguish between good and bad deflation. Good deflation occurs when prices are declining because of productivity gains. In this case (for example, electrical goods like computers), declines in prices result in increasing sales.

The editorial also argues for inflation on the grounds that the effects of low inflation are damaging to governments and some consumers with high debts. What it fails to point out is that the debt relief gained by those groups is always at the cost of a counterparty who either does not anticipate inflation correctly or is unable to do so because of central bank’s financial repression policies.  Cash savers with low interest rates, workers with below inflation pay rises, and pension funds holding government bonds are all paying for the central bank’s inflation policies.

The world’s biggest problem is not low inflation, but high debt.

Economist 2

 

 

 

 

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