The claims that higher inflation is good for us are not backed by reality

Some issues just keep returning like a boomerang and the idea that higher inflation is good for us is something that makes me think of these lines from Hotel California by The Eagles.

They stab it with their steely knives,
But they just can’t kill the beast.

This is an issue that the Ivory Towers return to again and again in spite of the fact that the evidence is the other way. Let me show you what has triggered the revival of this particular beast. From Eurostat yesterday.

Euro area annual inflation is expected to be 1.2% in May 2019, down from 1.7% in April according to a flash
estimate from Eurostat, the statistical office of the European Union.
Looking at the main components of euro area inflation, energy is expected to have the highest annual rate in May
(3.8%, compared with 5.3% in April), followed by food, alcohol & tobacco (1.6%, compared with 1.5% in April),
services (1.1%, compared with 1.9% in April) and non-energy industrial goods (0.3%, compared with 0.2% in April).

I have give you the full breakdown because as you note that inflation such as it is finds itself driven by energy and food prices. So the core measures so beloved of central bankers will be even lower than the headline. You can take your pick from the choices but if you exclude energy core inflation falls to 1% and the food category ( along with alcohol and tobacco) it falls even more to 0.8%.

The Perception

This is perceived to be a failure as inflation nutters look back to a headline inflation level of 2% last May. In terms of the ECB ( European Central Bank) target last May was bang on although if one indulges in some numerical pedantry we know that former President Jean-Claude Trichet defined the target as being 1.97%.

So we have fallen below it and the picture on the core measures is lower than that. Hence the argument that something needs to be done. This is added to by inflation expectations and here people like to concentrate on the 5year, 5year swap which this morning has fallen to 1.26% according to Bloomberg as opposed to the 1.8% that 2018 opened with. So if you believe it we will see lower inflation for the next five years.

Before I move on I would just like to be clear that I have little or no faith in that swaps contract as being reliable. Just like in other forwards markets it tells you what we know and think now which is not a reliable indicator of the future. Putting it another way Frederik Ducrozet has broken it down.

His breakdown, which is based on models used in a 2017 ECB working paper, show that actual inflation expectations have made up over 30% of the drop in the forwards pricing this year, up from less than 15% in the past year. ( from

As you can see even fans of the measure only think 30% of it is relevant

The Problem of a 2% Inflation Target

It is time for my regular reminder that the 2% inflation target was pulled out of thin air. Or to be more specific it was chosen because it “seemed reasonable” by the Reserve Bank of New Zealand. On that basis the 1.2% of the Euro area can also seem reasonable. Personally I would prefer it but I will come to that later.

Higher Inflation Targets

The Ivory Towers have regularly pressed for this as we step back in time to June 2014 and look at a working paper from the IMF.

This essay argues that a two percent inflation target is too low. It is not clear what target is ideal,
but four percent is a reasonable guess, in part because the United States has lived comfortably with
that inflation rate in the past.

Most of those would lived through such periods would not agree with that but remember it is a long way down to the reality of earth when your Ivory Tower is in the clouds. More recently Adam Posen of the Peterson Institute suggested this for the ECB.

committing itself to forms of fiscal quantitative easing, and working with other central banks to raise inflation targets above 2 percent.

As you can see we are being taken to extreme levels of central planning here. Back when he was at the Bank of England Adam Posen supported ever more extreme monetary measures but we never get an answer to the question why we always need more? Also of course he left the Bank of England due to this.

‘They should have somebody who gets it right and not me. I am accountable for my performance.’

You may not be surprised to read that he got inflation wrong after expecting a decline and getting an overshoot.

The Ordinary Person

If we look at a breakdown of inflation in 2018 from Eurostat the ordinary person might be convinced inflation is already at the levels the Ivory Towers want.

On average, household electricity prices in the European Union (EU) increased to €21.1 per 100 kWh (+3.5%),
between the second half of 2017 and the second half of 2018………Household gas prices increased by 5.7% on average in the EU between the second semester of 2017 and 2018 to €6.7 per 100 kWh.

Also the Ivory Towers look at inflation numbers and make a clear error which is not to acknowledge the fact that we require housing. The Euro area numbers only account for those who rent and not those who own so let me help out a bit.

House prices, as measured by the House Price Index, rose by 4.2% in both the euro area and the EU in the fourth
quarter of 2018 compared with the same quarter of the previous year. These figures come from Eurostat, the
statistical office of the European Union.
Compared with the third quarter of 2018, house prices rose by 0.7% in the euro area and by 0.6% in the EU in the
fourth quarter of 2018.

We do not know the more up to date numbers but if we take the broad sweep they would be an upwards influence if they were counted in the official measure as they were supposed to be. I will not tire you with the details here as it is an area of expertise for me and to cover it fully is worthy of an article on its own. But the summary is that after years of what the apocryphal civil servant Sir Humphrey would call “fruitful work”    we have arrived back at the beginning or if you prefer it in musical terms.

We’re on a road to nowhere
Come on inside
Takin’ that ride to nowhere
We’ll take that ride ( Talking Heads)

Thus our Ivory Towers with their core measures make a pretty clean sweep of missing the areas which are most vital as we note they include food,energy and shelter.


There are two essential problems with the arguments above. The opening one is the changed behaviour of wages. Pre credit crunch we had the so-called NICE period where wages growth generally exceeded inflation. It changed things and the pattern now is that the relationship was broken as we have seen periods where real wages have fallen. In my country the UK the sharpest real wages fall came when Adam Posen got the sort of thing he wanted as inflation went above 5% but wage growth did not respond. Putting it another way we got a real wage boost when inflation fell in the period 2015/16 which was exactly the reverse of the somewhat hysterical headlines from that period suggested. Also since my post of the 29th of January 2015 I have regularly pointed out that lower inflation has clearly been a boost for retail sales across a wide range of countries.

Next comes an issue which I will highlight with a simple question. Why do we always need more stimulus? The proponents of them never answer this. The issue that we may make marginal temporary gains but face permanent losses gets marginalised and pushed aside.

Also the stimulus has quite often failed in generating either inflation or growth. The place that has tried pretty much everything is Japan and here is Governor Kuroda from the end of last month.

Bank of Japan Governor Haruhiko Kuroda said major central banks may have to become more flexible targeting inflation, as they are missing targets due to the price dampening effects of technological innovations and globalisation.

He is getting so desperate he now needs to present “technological innovations ” as a bad thing. I bet he will not be getting rid of his smartphone.




25 thoughts on “The claims that higher inflation is good for us are not backed by reality

  1. Inflation is only good for a debt based currency (issued by private banks) as it is the only way to generate growth to pay the interest back (as only the principle is created by loans).

    Deflation is a killer in a system like this

    Governments also like it as it a form of stealth tax which erodes their debt and other commitments (such as pensions) as it enables them to pay back the nominal amounts agreed to (whereas in reality the actual value is eroded over time).

    Deflation is good for ordinary people (which is why it is so disliked by the establishment)

    • I agree with you. Deflation is a fierce and challenging out of control firestorm to a house made of straw. That is why stimulus is always needed, to protect the leaders of the status quo. Without things continuing as they are how would we stay in control of the future?

    • with RPI did we ever get dis-inflation ?

      I thought we didn’t – don’t count on CPI , thats fake news 😉


  2. Hello Shaun,

    I remember when HMG and CB all though zero inflation was a good idea. I have since come to the conclusion that they know nothing at all ( apart from the fact that RPI is used for their pensions and therefore “good” for them if its high )


    • Hi Forbin

      I can answer your earlier question which is that we got RPI dis-inflation peaking at an annual rate of -1.6% between March and October 2009. Grim times for Bank of England pensioners. The irony is that the Bank of England gave it a shove with its cuts to mortgage rates, they may only be ~2.4% of the index but if you slash rates like it did……….

      Also the depreciation section of the RPI showed what house prices were doing by moving from 306.3 in January 2008 to 263.8 in June 2009. No wonder the Bank of England started QE,

  3. Inflation suits economists and governments because ultimately it gets mis-counted as economic growth and they can attribute this growth to their policies and claim it validates it.

    It also leads to asset price growth – housing and shares, making people feel both wealthy and clever at the same time as if their astute purchase and indebtedness has somehow led to their increase in prosperity.

    Naturally this is of little interest and great frustration to renters and first time buyers excluded by high prices or those unable to afford to save and buy shares.

    The under measuring of the real inflation figure also leads to the loss in purchasing power of the average worker as his wage demands are aimed much lower than the real figure required to maintain their living standards, add in the fact that unions are today either unwilling or unable to achieve even the fake inflation figure of their members, means their standard of living is going down year after year.

    Central bankers also seem to think people like rising prices, I don’t know about anyone else but I can clearly see the negative affects the above have on my personal economic well being and do not think rising prices of food, energy and other essentials can be positively associated with the above gains nor should they be used to justify or be made to accept one as the price to pay for the other, I want lower house prices AND food and energy!!!

    Then of course there is the old chestnut of fighting deflation at all costs as people will put off purchases if they think it will be cheaper next month, how about some items that have got cheaper over the last twenty years? the list is very small and probably restricted to consumer electronics and computers, so how many people decided to delay the purchase of their new or replacement PC or laptop because they relentlessly just keep getting cheaper and better over time? How many people are still watching their old CRT TV because they couldn’t bear the thought that the new LCD or OLED they were going to purchase would be cheaper next year?

    Of course it’s all nonsense, but don’t think central bankers will be questioned on it by the mainstream media or challenged by politicians, just expect massive stagflation over the coming decade to inflate away the debts of both consumers and governments

    • “but don’t think central bankers will be questioned on it by the mainstream media or challenged by politicians,”

      makes you wonder why …….. too many “distractions” for the people?


  4. The last 40 years of consumer electronics and computing have shown that an industry can thrive on deflation of 50% every 18mths (Moores Law).

    The only justification for the belief that deflation is bad is that in the past deflation has been driven by bad economic times. But deflation doesn’t make times bad unless something else is already awry, IMO.

    • ” in the past deflation has been driven by bad economic times.”

      by that measure surely then that shows the economy is not in a good place

      why do governments need to own so much of the corporate world ?

      eventually the truth will out…………


  5. Without getting into complex theories this is my pennies worth.

    Deflation can be damaging to banks and funds so the banks don’t want deflation, neither do they want high inflation that can also be damaging. So they set a target of 2% which gives the impression that the governments are doing their best to stabilise the economy the theory is about right but theories are only as good as being able to abide by the said theory but in practice its virtually impossible due to too many variables in economics.

    So imo the theory is correct but in practice its hard to achieve.

    • eheheheh indeed !

      “In theory there is no difference between theory and practice – in practice there is” (Yogi Berra)

      • Ahh the great wisdom of Yogi, he was a legend, with a few tweaks he would have made a great central banker, with logic like his he could have made Chairman of the Fed no problem:
        “When you come to a fork in the road…. take it.”
        “You can observe a lot by just watching.”
        “It ain’t over till it’s over.”
        “No one goes there nowadays, it’s too crowded.”
        and my favourite
        “The future ain’t what it used to be.”

      • forbin,

        I wish I knew what I was talking about, I think I do though sometimes I have to question my own judgement and I suppose everyone else does with the economic policies they set out.

        At the end of the day man is a fallible creature if one could predict how things could work out correctly the world wouldn’t be in such a mess.

        Even Professor Hawking’s had to admit his first theories on quantum mechanics was flawed years later:

  6. Regarding the great depression of the 1930s, which incidentally was caused by the Fed keeping rates too low for too long and creating……….yes a stockmarket bubble!(nothing has changed has it, only the waffle, lies and excuses from so called experts to deflect blame away from central bankers), I remember seeing a documentary on it and there was “survivor” who recounted the massive falls in prices and quoted “a 56lb bag of flour cost just 29cents…the trouble wuz…where the hell where you goin to git the 29cents from!”.

  7. Great blog, Shaun, as usual.
    Lots of people admire the kiwis for being the first to adopt inflation targets and the first to adopt an inflation target indicator with an owner-occupied housing component based on the net acquisitions approach. However, they don’t deserve the credit (blame?) for the 2% inflation target rate. “The first Monetary Policy Statement, released in April 1990, specified that a 3% to 5% target range be achieved by December 1990, a 1.5% to 3.5% range by December 1991, and a 0% to 2% range by December 1992 and thereafter.” This was consistent with a first Policy Targets Agreement (PTA) signed in March declaring a 0% to 2% inflation range to be the objective. So 2% was not their target rate but the upper bound of their target range. Even if the New Zealanders got Marie Henein as their lawyer, I don’t think they could adjudicate a claim to the 2% target rate. First, the mid-point of the target range for December 1991 is 2%, but the target range is only an intermediate one, on the way to a 0% to 2% range, whose mid-point is 1%. The second PTA, signed in December 1992, also had a 0% to 2% range. Second, the mid-point of the target range had no special significance in these PTAs. It was only with the September 2012 PTA, which had a 1% to 3% target range, that the phrase “with a focus on keeping future average inflation near the 2 percent target midpoint” enters the PTAs, where it has been ever since. The 2% target rate was a Canadian invention, like the game of basketball.

    • Hi Andrew and thank you

      I did know that James Naismith invented basketball but did not know he was Canadian. So that would make a Toronto Raptors victory in the NBA rather appropriate. Good luck for later.

      As for the 2% target I am happy to give the credit in future to Canada although as you say some may see it as the blame.

      • Thank you, Shaun. Yes, I think blame rather than credit for the 2% target rate is appropriate. The two men who inked the first Canadian inflation control agreement, Finance Minister Michael Wilson and Bank of Canada Governor John Crow, a Londoner like yourself, only saw a 2% rate as intermediate on a path to a lower ultimate rate, certainly no higher than 1.0% or 1.5%.
        James Naismith definitely was Canadian, born in the charming Ottawa Valley town of Almonte, just 50 kilometres from Ottawa. The Raptors will start their first away game in less an hour, once more going boldly where no Raptor has gone before.

        • Don Brash often shows up on NZ TV . On the rare occasions he talks about his time as Reserve Bank Governor he is quite clear about his remit. That was: to get inflation down from the double digit inflation he inherited in 1988 to as low as possible – and not higher than 3%.
          The 1990 policy target was 0-2%

          Today the policy target is 1-3% with a focus on the midpoint.

          30 years ago the NZ powers that be were quite clear that price stability meant no inflation.

          So, we are all clear where the blame lies ……..

          Interestingly, Don Brash started his banking career in Washington DC at the World Bank. He started at the top and worked his way down.

  8. Hello Shaun,

    in other news …..”German authorities are working on guidelines to allow them to access data held by voice assistants like Amazon’s Alexa or smart fridges to help them fight crime, ”

    so CB and TBTF banks own all the companies and if you are indicted for a “thought ” crime you will be stitch by your digital assistant….

    where’s your freedom of expression now , folks ?


  9. Does the move from pil and gas to electric and green energy suggest over time that component of inflation will decline.

  10. Pingback: The claims that higher inflation is good for us are not backed by reality - Free World Economic Report

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