Is inflation back?

Rather a big question for a blog posting. This is not going to provide an answer, but a couple of observations.

  1. Trying to measure inflation objectively by means of indices is nearly impossible. Take wage inflation, often seen as one of the two principle causes of an inflationary spiral (and intimately connected with the other commonly-cited cause - cost-push inflation - on the basis that wage inflation is often the result of inflation in the cost of living). The FT carried an article today entitled "Comfort for Bank on wage increases", in which they reported the ONS's figure for wage inflation of 3.7% for the final quarter of 2006 and the EEF's (Engineering Employers Federation) assessment that settlements amongst their members had averaged 2.9% in the three months to the end of January 2007. On the other hand, the Daily Telegraph's jobs supplement (ironically printed on FT-pink paper, and not currently available online) led with "Inflation fear as pay rises touch 4.5pc", based on the Daily Telegraph Croner Reward index, which showed rises in basic pay increasing from 4.2% in November 2006 to 4.6% in January 2007. Strangely, however, Croner Reward's own figures showed that the average settlement over the last 4 months upto January 2007 was just 2.6%. What is a poor central bank to do? Perhaps that explains the FT's other headline on the subject: "MPC plagued by inflation uncertainty". Even if it is no longer in the power of the Bank of England to control, we need a return to the concept of inflation as the measure of expansion of the money supply, not the measure of some artificially-constructed, and subjectively-compiled index.
  2. This might sound like general economics, and nothing to do with Picking Losers. But allowing inflation to take hold is, in fact, one of the classic ways for a government to create winners and losers. Naive economists, who treat aggregate statistics as though they represent a generality that exists in real life, talk of inflation-levels, wage-levels, price-levels etc as though those things move homogeneously across the economy. In practice, the averages conceal wide variations across the economy. Inflation does not occur equally at all places and at all times. Some parts of the economy experience it before others. Those whose incomes inflate ahead of cost inflation are winners in the process. Those whose costs inflate ahead of their wage-increases are losers. Those who make goods whose prices inflate early in the process (e.g. ahead of the prices of their suppliers) are winners. Those who make goods whose prices are pushed up towards the end of the process to take account of already-experienced increases in costs are losers. Hence the complaints of the many (perhaps the majority) who feel themselves to be considerably worse off than they are told that they should be, according to the aggregate statistics. They are experiencing reality, not some artificial average.

What effect it has depends on where the money is injected, but inflation is always a monetary phenomenon. We need to find a way to bring the spiralling growth of our money supply back under control.

(See, for a detailed exposition, the various works of Ludwig von Mises, particularly Human Action, his magnum opus, The Theory of Money and Credit, his highly-regarded fusion of subjective marginalist and monetary theory, and his prescient articles in The Causes of the Economic Crisis, or Henry Hazlitt's Economics in One Lesson for an approachable introduction.)