What’s Wrong Anyway…..With A Bit Of Inflation?

With the Pound being devalued by circa 20% against most world currencies, in the post Brexit era, there is palpable fear that imported goods will ‘stoke up’ inflation, which has already risen by 0.05% in the last few months.

Mark Carney, the Governor of the Bank of England, has predicted that inflation will rise from the current 1% level to 2-3% in the next few years, assuming of course that Sterling does not appreciate in the interim period.

Threat of inflation

Some of us are getting very vexed about the threat of inflation and the nightmare overtures of hyperinflation in the teens, that was ubiquitous in the halcyon days of the 80s and ‘blighted’ Margaret Thatcher’s economic record at the time.

The collapse of oil prices, competitive food retailing, wage rises under control and excess supply in the consumer market, have all conspired to reduce inflation to what has been a post War, unprecedented low point of 0.3%, such that recently, financial commentators have been much more concerned about the spectre of deflation, than anything else.

By way of illustration, deflation, or perhaps ‘stagflation’, has been the scourge of the Japanese economy for some 30 odd years. When one is in this ever-decreasing, implosive spiral, it is very difficult to break out of it. To economists it is like a ‘black hole’ that absorbs everything.

Debt shrinks in relation to equity

‘Worry not, my fine feathered friends’ a little bit of inflation maybe a good thing when you are recovering from a ‘low point’ and where growth is also present at the same time.  As a direct result of this, debt shrinks in relation to equity, which is no bad thing if you are a homeowner with a mortgage or for the debt of The Nation.

With the advent of ‘E-commerce’, the ability of the consumer to drive down prices is very effective, particularly where on-line shopping becomes the ‘norm’ and where Internet companies can make sizable profits from much lower prices.

Private and Public Sector pay, in real terms, has been rising of late with low inflation and, unfortunately, this will be under threat if the RPI level goes up and it will put pressure on wage increases for industry and the government alike.

Germany has an almost ‘perfect economy’

As the second largest exporter in the world, Germany has an almost ‘perfect economy’ comprising trade and budget surpluses, full employment and an acceptable rate of growth. Were it not for the rest of Europe the Euro would be at a much higher level than it is.

To Germany, the Euro effectively represents a devalued Deutsch Mark, which would be so over-valued against world currencies, that it would have a suffocating effect on their exports. The US has always ‘craved’ a lower Dollar, particularly after recessions, as this is a boost for exporters even though it may have the effect of importing inflation.

So, a cheaper currency is good for a nation if one want to help exporters and encourage inward investment – which is no bad thing in uncertain times particularly in the UK at the moment.

Rise of inflation may raise Interest Rates

Clearly, if the rise of inflation exceeds 2.5-3%, Mr. Carney, trusting that he is still in the job, will have to raise Interest Rates and this will have the effect of also increasing Mortgage Rates that may not be so good for the Residential Property Market or the Capital Markets even though, paradoxically, the Pound could rise as a result.

Let us hope that this scenario will not happen during the ‘hiatus’ whilst ‘Article 50’ has been issued next year and negotiations are in ‘full swing’ with Europe about the future form of trading arrangements with the UK.

Prime Minister May is absolutely right to deny the Press a running commentary on this. The negotiation process is ‘rife’ with posturing, ‘sabre rattling’ and ‘brinkmanship’ and the last thing you need for such complex discussions is to ‘give the game away’ beforehand. I don’t know many Poker players who disclose their cards to their opponents before the game starts.

Stuff of dreams

Unfortunately, UK holidaymakers are being ‘hit in the pocket’ when they buy foreign currency, but perhaps this is an opportunity to enjoy some of the ‘glories’ of the ‘Great British Riviera’.  Holidays in Britain are, and should be, the ‘stuff of dreams’ and maybe we have forsaken this by cheaper air travel and  ‘worshipping the sun’ and what a pity this is too.

We do not need to ‘buy’ Britain; we already own it, so let us enjoy it to the full.