Hamish McRae: Low inflation? Let’s enjoy it while we canComments Off on Hamish McRae: Low inflation? Let’s enjoy it while we can
A world where people get increases in their living standards more from lower prices rather than from higher incomes.
And a world where the lazy excuse of “inflation” cannot be used to justify sloppy management in public and private sectors alike.
We are not there yet, for UK consumer prices are still higher than they were a year ago. But only just, and it looks as though they will dip below the waterline during the summer before climbing again.
But prices are falling across most of the eurozone and the financial markets seem to be saying that there will be no inflation in Europe ever.
How so? Well, yields on the five-year government bonds of several countries, Germany in the lead, have gone negative. The Germans can borrow for 10 years at about 0.7% and 30 years at 0.9%.
Zero inflation is quite outside our experience because the experience of almost everyone alive today has been a world of inflation.
That was extreme in the 1970s when UK inflation rose above 20% and prices in shops were being put up every month. Jolly scary it was too.
On a very long view, the aberration was the 20th century, with Germany and a number of other countries experiencing hyper-inflation in the 1920s and the entire developed world having rapid inflation in the 1970s and 1980s.
A famous study of prices in England from the Middle Ages onwards by Sir Henry Phelps Brown and Sheila Hopkins showed there was basically no significant increase in prices from the 1300s to the 1500s, prices then rose roughly four times as a result of the opening up of gold and silver mines in Spanish America and there was another period of reasonable stability through to 1914.
Periods when prices rose, such as during the Napoleonic Wars, were offset by those when they fell, such as the Victorian era.
That is not to say this will be the experience of young people in Britain now although something close to that has occurred in Japan over the past 25 years.
Our present sub-1% inflation is a function of one-off forces, notably the plunge in energy prices, and underlying inflation is somewhere around 2%. But the working assumption of most of us that inflation will settle at 2% or a bit more may prove wrong.
Our long-term rates are not quite as low as those of Germany but they are lower than they were during the Victorian period. Insofar as they are signalling anything coherent, this would suggest that inflation in the UK will be 1% or less over the next 30 years.
Markets are far from omniscient. But the narrower point that in the short term there will be very little inflation in much of the developed world still stands. The longer price stability persists, the more our attitudes will change.
It will change the way government interacts with the electorate. You can see an example of that in Britain.
If Labour had expected consumer prices to be falling at the time of the forthcoming election, it would hardly have seized on the “cost of living crisis” as a vote winner.
Ditto the idea of a freeze on energy prices. To be fair, a lot of us failed to spot the scale and extent of the plunge in the oil price, but we are not in the business of pitching for votes.
It may turn out that price stability makes voters even more resistant to tax increases than they would be in a period of general inflation.
It certainly will not bring governments the endowment effect, whereby inflation brings higher-than-expected revenues.
It is not just a question of lower oil prices cutting North Sea revenues. Earners are pushed into higher tax bands, and revenues from asset inflation boost inheritance tax and stamp duty.
For the business community as a whole, a world where you can’t increase your prices is a stern discipline.
“Why,” a top retailer asked me the other day, “if the statistics say the economy is booming, does it not feel like a boom to us?”
I think the answer is that, in a world of flat prices, retailers have to run to stay in the same place. They are one of the groups that are disadvantaged.
Zero inflation is obviously bad for those who have over-borrowed — countries as well as companies and people —because the real value of the debt is no longer whittled away.
But it is not bad for consumers. Quite the reverse. During the 19th century, living standards rose by between 1% and 2% a year even as prices fell.
We already get a lot of our improvements in living standards by falling prices: think of the way mobile communication costs have fallen as well as the service becoming immeasurably more extensive and competent.
Inflation will in all probability make a comeback. It is in the self-interest of governments to try to generate it, and people like the money illusion. We feel richer if we have more money, even if that money buys us less.
The pressure is on central banks to do anything and everything to crank up inflation. If they succeed, people who bought government bonds in recent months will lose a packet.
Actually a lot of us think that the main problem for places where deflation is entrenched, especially much of the eurozone, is not falling prices as such but lack of demand.
But that is not our problem in Britain, and consumers should enjoy price stability while it lasts.