March 1, 2015


Zero inflation is great (so long as you're not in government) : Victorians enjoyed higher living standards without price rises. Maybe the 20th century was an aberration (HAMISH MCRAE,  01 March 2015, The Independent)

[I]n a very long view, the aberration was the 20th century, with Germany and a number of other countries having hyperinflation in the 1920s and the entire developed world having very rapid inflation in the 1970s and 1980s. There is a famous study of prices in England from the Middle Ages onwards by Henry Phelps Brown and Sheila Hopkins which showed that there was no significant increase in prices from the 1300s to the 1500s, that prices then rose roughly four times as a result of the opening up of gold and silver mines in Spanish America, and there was another period of reasonable stability until 1914. Periods when prices rose, such as during the Napoleonic wars, were offset by periods when they fell, such as the long Victorian era. If you were born in 1820, you would only know stable or falling prices.

This is not to say this will be the experience of young people in Britain now, though something close to that has occurred in Japan over the past 25 years. Our sub-1 per cent inflation is a function of one-off forces, notably the plunge in energy prices, and underlying inflation is around 2 per cent. But the working assumption of most of us that inflation over the next few years will be 2 per cent or a bit more may be wrong. Our long-term rates are not as low as Germany's, but they are lower than in Victorian times. This would suggest that inflation in the UK will be 1 per cent or less over the next 30 years. Of course, the markets may be wrong; this has been known. But the narrower point that in the short-term there will be very little inflation in much of the developed world stands. The longer that price stability persists, the more our attitudes will change. [...]

For the business community, a world where you can't increase your prices is a stern discipline. "Why," a top retailer asked me the other day, "if the statistics say the economy is booming, does it not feel like a boom to us?"

I think the answer is that, in a world of flat prices, retailers have to run to stand still. Zero inflation is obviously bad for those who have over-borrowed, countries as well as companies and people, because the value of the debt is no longer whittled away. But it is not bad for consumers. Quite the reverse. During the 19th century, living standards rose by between 1 and 2 per cent a year as prices fell. We already get a lot of improvements in living standards from falling prices: think of the way mobile communication costs have fallen while the service has become more extensive and competent.

Posted by at March 1, 2015 6:57 AM

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