Updated: May 19
There are very tentative signs of improvement in inflation numbers around the world (improvement could mean it either rising if it is too low or falling if it is too high). Numbers in Japan and the UK, while still below desired levels, were higher than both prior month and survey. Among the BRICS countries, China and India saw a similar pattern, though inflation rates in Brazil, Russia and South Africa were still high and rising.
"Central banks have come a long way from the policy errors of the Great Depression"
I remain of the view that although monetary policy is not a cure for all ills, it can certainly help to get inflation back to desired levels in the medium term. For further reading, I would recommend former Fed governor Ben Bernanke’s 2002 speech Deflation: Making Sure “It” Doesn’t Happen Here. Below is an extract:
By increasing the number of U.S. Dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in Dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
I do not believe as some do that QE has failed. Frankly, what choice did central banks have once short term rates hit the zero bound? To get out the white flag and give up? Although headline inflation rates across the developed world are very low and in some cases negative, this is largely the result of falling commodities prices, in particular the oil price. Taking out food and energy, inflation is not so worryingly low. Yes, it will likely be a long haul, but central banks have come a long way from the policy errors of the Great Depression. And even Germany now understands that in combination with sensible fiscal policy, QE does not have to lead to hyperinflation.
Published in Investment Letter, February 2016
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.