Looking at context first, with regard to wealth the impact of inflation is unusually predictable. Inflation erodes the sum a debtor owes to the person who has lent to them. Deflation increases the sum owed to a lender. In quite straightforward terms inflation reduces the financial wealth of those who own debt and increases the net financial worth of those who owe money. Since the owners of debt are, by definition, wealthy it is very easy to see why inflation has come to be seen as the curse that it is usually represented to be. Low inflation preserves financial wealth so low inflation is good is the logic,
Thus Spud argues for higher inflation.
Spud also argues that we should all be saving for our pensions using bonds.
The second is that inflation is woefully inadequately measured because it ignores asset price changes and so, by implication, one of the biggest costs of living in the form of house prices.
Sigh, RPI includes cost of housing, CPI does not.
This contrasts with controllable inflation arising from situations capable of being influenced by the government of the state whose currency is inflating. These might be wage inflation; excess demand in the economy or a shortage of taxation to counter the level of government spending
Amazingly, the thought of reducing the government spending does not occur to him….
Excess demand is an absolute and a relative term: absolutely it indicates an unjustified exuberance beyond the capacity of the economy to meet demand. Relatively it is an exuberance of demand relative to the capacity of people in the economy to pay. The responses are quite different. The first needs interest rate rises; the second pay rises.
That’s a Nobel winning insight. Excess demand comes from low wages.
As for inflation due to insufficient taxation, we have seen the exact opposite for a long time: the inflation rate has suggested over taxation.
Says the man who wants to increase taxation by reducing the tax gap. As the Spuddie argued only yesterday:
I well remember Jacob Rees Mogg arguing against Michael Meacher in the House of Commons on one of the Private Member’s Bills I wrote for Michael. The aim of the Bill was to tackle tax evasion, which is money that is already due to HMRC. Rees Mogg’s argument against the bill was that it would result in more tax being paid and that was undesirable as a matter of absolute fact, so it must be opposed. I was shocked but in a moment realised the true agenda.
Yep, there it is:
It is my suggestion that this is where the UK finds itself now. It is true that there is too much debt, but to control that with interest rate increases will exacerbate the true crisis, which is a shortage of labour income within the economy as a whole.
It is also true that most of the current inflation is uncontrollable, unless Brexit us cancelled and OPEC respond by increasing oil supply, both of which are incredibly unlikely.
In that case, let’s be clear; the UK does not need an interest rate rise now. But labour markets are in need of fundamental reform to support and improve long term lay rates, and there is no sign of that happening. That’s the big issue around inflation that needs addressing. And there is no one to address it. And that may be the biggest failure in UK political economy right now.
We should reduce inflation by increasing pay for everyone. Truly a Nobel winning idea.