Inflation or war? Best hope for inflation

With the other common way out of financial crises being war, inflation is the least worst solution to our massive debt problem, says Merryn Somerset Webb.


Inflation. It looks like it might be back. The average economist now believes that the consumer price index will hit 3% over the next few months, says the Telegraph. Oxford Economics said last week that it is already nearing 1.3% and September numbers just out show it at 1% (against a consensus estimate of 0.8%).

This will make intuitive sense to most readers. After all, the pound has fallen by 17.5% since the Brexit vote and the UK is nothing if not an enthusiastic importer. Retailers hedge currency exposures but not more than six to 12 months at most. The result is that if they don't take the hit on their margins (some will take some) prices in the shops should start rising into 2017: the January sales might represent the last sterling bargains UK consumers see for a while.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Most people will be extremely unhappy about this. The Bank of England and the Treasury won't be. Yes, Mark Carney will soon have to write letters to the chancellor explaining the overshoot, and yes he will have to say in those letters that it is partially his fault (QE and cutting rates just after the referendum). But he has already said that the bank isn't planning on raising rates just because inflation is on the up. We also know that he isn't bothered by the idea of inflation being lower than interest rates (it already is).

The truth is that the Bank of England has been attempting to shove inflation up for years (that's what the QE was about in the first place). The fact that it is happening in a way it claims to disapprove of does not mean it will look a gift horse in the mouth. It won't.

Advertisement - Article continues below

Those wondering why should revisit the reason everyone was after higher inflation in the first place: it is all about the debt. 2008 was about unsustainable levels of borrowing. There can be no full and long-term recovery without a serious fall in the national debt burden. QE has provided some cover for the problem very low rates mean people can keep servicing if not repaying debt. But the nasty side effects (capital misallocation, wealth inequality) are as unsustainable as the debt itself over the long term. So the debt itself must be addressed.

The only relatively easy way to do that is to create proper inflation and to keep interest rates lower than inflation. That way, as Jonathan Ruffer puts it, the "borrower would ultimately repay less in real terms and he would have been shielded from having to pay an interest rate which fully reflected the windfall reduction in the real value of his debt."

It would be (and already is) horrible for savers (the value of their savings falls in real terms and no one compensates them) but, says Ruffer, it is the "least destabilising" solution to our massive debt problem. The other common option to post financial crisis unrest is, as a historian friend reminded me this morning, war. Best hope for inflation.




Weak inflation data may gives the Bank of England an excuse to cut rates

UK inflation is edging lower, and is now well below the Bank of England’s 2% target rate. That could mean even lower interest rates. Here's why. 
15 Jan 2020

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019

UK inflation little changed in May

The inflation rate in the UK was little changed in May, compared to last month. Here, John Stepek looks at what's been happening to prices in the UK.
19 Jun 2019

Get set for an inflation scare

Investors are getting complacent about inflation. They should prepare themselves for a fright.
3 May 2019

Most Popular


What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020
UK Economy

The UK’s bailout of the self employed comes with a hidden catch

The chancellor’s £6.5bn bailout of the self employed is welcome. But it has hidden benefits for the taxman, says Merryn Somerset Webb.
27 Mar 2020

Gold is hard to find right now – so should you be buying?

With demand through the roof and the physical metal hard to find, it's not the best time to buy gold. But right now, says Dominic Frisby, you want to …
25 Mar 2020
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
27 Mar 2020