An end-of-year pause

Lately much of my writing has focused on the cost pressure arising from our increasing reliance on credit and the growth of finance. For me, "financial cost" explains what happened to our economy between the end of the second World War and the disruption of 2007-2010. But the story of what happens in the years ahead may be different.

At the time of the disruption and the first Quantitative Easing, there was much concern about inflation; this concern lasted several years but then, like Q.E. itself, abated. There has been little such talk since that time. Instead, inflation talk has been chiefly about the difficulty of reaching the target of two percent inflation, or about raising that target.

Recently, in response to covid, there has been renewed increase in money printing. But apparently those who warned of inflation from Q.E. were stung by the failure of that inflation to appear, for there seems to be no renewed increase of inflation warnings. People learned their lesson, and we no longer rattle the bars of the ape cage with warnings of inflation. 

Not talking about the threat of demand-pull is dangerous.

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In Inflation is not a cost-push phenomenon, Dr. Pirie writes:

... if people pay less for essentials because falling input costs allow lower prices, they will have money left to spend elsewhere, with the increased demand leading to higher prices in other sectors. The significance of this is that for over a decade cheap imports from China meant lower prices in developed countries for many household goods. The result was downward pressure on the consumer price index, leading central banks to keep interest rates low, with easy credit and cheap money.

And then, this:

The fall in prices was mostly in goods which show in the various price indices. It left people with money to spare elsewhere, some of which found its way into asset bubbles, including housing. Some of the goods which saw increased demand and higher prices did not feature in price indices, and therefore did not undermine the visible fall in prices. The choice of some items and not others to feature in price indices means that some price rises are effectively hidden from consideration.

When I read those two paragraphs I dismissed them impatiently because I was focused on cost pressure and on Pirie's analysis of cost-push in terms of "essential" and "non-essential" purchases.

But I was awakened in the middle of the night by the thought that some price rises are effectively hidden from consideration. It's true, you know.

This is not a story I would ordinarily tell. But it woke me up, so I had to tell it.

 

Happy New Year.