Inflation worries return

There is growing evidence to support our thoughts that the global economy has had it good for too long. Perhaps the problem with the frailty of the human mind is that when things are good we forget the bad times, and when things are bad we only think about the good times –hence we’re basically always optimistic.

The bad thing about optimism is that it leads us to suffer, we suffer from lack of preparedness, we suffer when things that go up, also go down. Not that we want to take the ‘gloomy’ view all the time, but we do see the global economy moving in a direction potentially contrary to how the worlds politicians might want us to see it.

We read an interesting article in Investment and Business News this morning which seems to support our views that inflation in many parts of the world is on the march….

Inflation set to soar? – BN 10th August 2006

From up high the hawk looks down upon the poor unsuspecting doves, preparing to swoop down, and ruffle a lot more than just feathers. Yesterday, the Bank of England governor Mervyn King sounded like an arch hawk, as he said we are "ready to take whatever action" is necessary to fight inflation. And then just in case we were in any doubt he said there was a 50-50-chance inflation would hit 3 percent this year, and it was even more likely it would reach that level in 2007.

Rising costs of energy have been joined by university tuition fees as the catalysts to rising inflation.

The Bank of England’s target for inflation is 2 percent, but should the CPI index move a full percentage point above or below that level, then Mervyn King will have get his writing paper out and send a Dear Gordon letter, explaining to the chancellor how it has happened.

Not so long so, the fear was that price rises would dip below 1 percent, and that deflation was the big threat. But now, it’s beginning to look as if rates could rise again, hitting 5 percent, and indeed if the 3 percent danger increases they could go up from there.

At a time when the consumer is in debt, retail is enjoying a precarious recovery, rates rises will hit the UK hard, but then the era of low inflation and sustained growth could not last forever.

For some time we have puzzled over the phenomenon of low inflation despite high consumer borrowing and record spending, something economic textbooks said was impossible.

Inflation doves dismissed recent inflation fears by saying the current increase in prices are one offs, promoted largely by the higher price of oil. But the danger is that the factors behind the benign climate of low inflation we have seen in recent years were also one offs. That low inflation was caused by cheap imported good from China and Internet induced competition, and that these are one-time only effects. […] For more see BN here.

Our thoughts are quite often with the side of the consumer. In the world we live in today pure economic theory is often manipulated by those who would devise to run our lives on a daily basis. Our concern for the consumer is that in the near term there may be a bigger backlash due to consumer spending and out of control debt in the OECD regions.

Many in Australia are beginning to worry that it could be slipping towards a recession. Too much borrowing, too much spending. Already the UK and the USA seem to be moving towards this as well.

As we outlined in our introduction, the consumer is generally the last one to see bad things happening, by the time they realize its already too late – it could be house prices or oil prices or inflation – but soon and at some point there will be a tipping point that will affect the consumers badly. More badly than if they were ready for it.