The Corner

Monetary Policy

Inflation or Not?

Whether or not inflation is on the way was one of the key economic debates of the coronavirus spring and, doubtless, we will still be arguing about it in the fall.

A note in Grant’s Almost Daily earlier this week drew me to these comments by Charles Goodhart and Manoj Pradhan, published on Vox’s CEPR Policy Portal.

The whole piece (which dates back to late March) is well worth reading, but this, in particular, caught my eye:

So, what will happen? Inflation will rise considerably above the level of nominal interest rates that our political masters can tolerate. The excessive debt amongst non-financial corporates and governments will get inflated away. The negative real interest rates that may well be necessary to equilibrate the system, as real growth slows in the face of a reversal of globalisation and falling working populations, will happen. Even if central banks feel uncomfortable with such higher inflation, they will be aware that the continuing high levels of debt make our economies still very fragile. And if they try to raise interest rates in such a context, they will face political ire to a point that might threaten their ‘independence’. Only when indebtedness has been restored to viable levels can an assault on inflation be mounted.

Under no circumstances do I favor negative interest rates, and the problem posed by “falling working populations” is — as automation grinds its way on through the workforce — at most transitional, but the key point is that debt levels are now ‘too high’ for a typical anti-inflationary regime to be deployed against inflation should it start to take off.

On the other hand, who will buy bonds that deliver a real rate of return that is below the rate of inflation?

I think I can guess.

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