Disinflation is a very unreliable boyfriend

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).

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.