Why inflation and the cost-of-living crisis won’t take us back to the 1970s

New Statesman

Surging energy prices force us to confront the suffering caused by inflation and our uncertain future. But a new wage-price spiral is still unlikely.

Prices are rising by 5, 6, 7 per cent per annum. In the US, President Joe Biden is under pressure over the increase in petrol prices. In the UK, there is talk of a cost-of-living crisis. The Bank of England is prescribing “tough love” in the form of steep interest rate rises. The Bild-Zeitung, Germany’s savage tabloid, pillories Europe’s central bankers for being careless about inflation. Bond markets are jittery.

It comes as a shock. Not so long ago, in large parts of the world, the main worry was not inflation but deflation. Now, even Japan – the poster child of “lowflation” since the 1990s – is experiencing price rises.

Whether prices go up or down, any change creates winners and losers. We worry about falling prices because they penalise those who have borrowed. Housing markets are spooked by even a hint of negative equity. Inflation, on the other hand, erodes savings and increases the cost of daily necessities.

In principle, economists tell us, we should welcome price changes. They are how market economies adjust to shocks, and Covid has certainly delivered a shock. It is one of the foundational ideas of neoliberal economics, classically formulated by Friedrich Hayek in his essay “The Use of Knowledge in Society” (1945), that prices are highly condensed vectors of information. Consumers and businesses don’t have to know much about what is going on, all they have to do is to respond to price signals. If prices go up, consumers demand less and producers supply more. That is the magic of market economies as super-efficient information-processing machines. Most recently, Philipp Hildebrand, vice-chair of the gargantuan asset manager BlackRock, has pleaded for central banks to tolerate inflation, because it “helps to smooth the adjustment to big shifts in patterns of demand”.

Read the full article at The New Statesman

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