Disinflation is a very unreliable boyfriend

Most economists seem confident inflation will fall gently to 1%. Their confidence is probably misplaced, says Merryn Somerset Webb.

I have been making mutterings here for some years now about our expectations that inflation will make a comeback in the West.

We've seen it in asset prices for ages, of course. But we have also long been convinced that the final consequence of today's ludicrously loose monetary policy will be much higher inflation than most people now expect. That might now be beginning to happen.

Look to the US. It is, as Edouard Carmignac of asset manager Carmignac Gestion points out in the FT this week, "experiencing its weakest post-recession recovery in any of the 11 cycles since the Second World War". And that's despite near zero interest rates and a four-fold expansion in the size of the Federal Reserve's balance sheet (thanks to QE).

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With that background in mind, says Carmignac, "the incipient rise in US consumer price inflation is a cause for serious concern". Incomes have barely budged in years, but the price rises are hitting a "broad range of non discretionary goods"; think motor insurance and toddler clothes.

The key point here is a frightening one: prices aren't rising as a result of buoyant consumer demand, they are rising because "companies are charging more for goods with inelastic demand in an attempt to offset low sales volumes". Something to keep an eye on.

All is not necessarily well in the UK either. Most economists now worry about deflation more than inflation, and assume that inflation is, at the very least, as Halkin's Peter Warburton puts it, "on a glide path" to 1%.

Yet the RPI, which we used to measure inflation for official purposes until quite recently, is showing 2.6%, and the CPI has just made a surprise (for most) jump from 1.6% to 1.9%. Disinflation, says Warburton, can be "an unreliable boyfriend" in a low interest rate environment.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.