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Market is Anticipating Low Inflation

Martin Wolf’s latest column manages to pack a staggering quantity of different ideas together. But this is a blog, so let’s just stick to one point — not only are the inflation hawks wrong to be worrying about inflation, they seem to be wrong that there’s any plausible high inflation scenario:

Higher prices of gold reflect fear, not fact. This fear is not widely shared. The US government can borrow at 4.2 per cent over 30 years and 3.4 per cent over 10 years. During the crisis, the inflation expectations implied by the gap in yields between conventional and inflation-protected securities collapsed. These have since recovered — yet another sign of policy success. But they are still below where they were before the crisis. The immediate danger, given excess capacity, in the US and the world, is deflation, not inflation.

Yes. Pre-crisis inflation expectations were low. Today’s inflation expectations are lower. And yet post-crisis the case for low inflation is weaker than it was pre-crisis. What we really should be worried about is that the rising volume of pay cuts will lead to unbalanced deflation and an unbearable debt load. Better to see a cheaper dollar and a modest level of inflation let us adjust in a balanced way.

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