The snow has melted and it’s time to make plans for the future again. And like every spring, those plans are likely to include what has become known as “reflation” — inflation increasing again to a level where it can eat away at the mountain of debt the world’s big economies have to deal with.
Will consumer price inflation, rather than inflation in asset prices like property and securities, finally take off? There have been two interesting points of view last week on this issue.
Let’s start with Societe Generale’s Albert Edwards, renowned for his bearish take on the markets. He noted that positioning in two assets that are crucial for inflation was extreme: long oil and short US Treasuries.
From a contrarian perspective, this makes oil prices vulnerable to a pullback. As for US Treasuries, the “massive short” positioning means it’s difficult to see how the yield will surge higher in the near term, he says.
There is a psychological level of 3% for US Treasury yields that will be difficult to leave behind, as it represents strong resistance for quite a few technical analysis experts.
So that’s it for inflation in the short term, apparently. What about the long term? Here’s where the second point of view worthy of attention comes in.
The key to the failure of consumer price inflation to take off is the fact that we’re getting older, at least in developed countries. Research by Oxford Economics shows that older populations are prone to lower inflation.
The reasons for this are multiple. Older populations depress demand for many goods and services, while higher savings depress yields. Also, voters influence macroeconomic policy, and in a society with a higher proportion of aging people, they will dictate these policies.
Oxford Economics’ research points out that countries with younger populations have adopted slightly higher inflation targets than the ones where the percentage of people over 65 year of age is higher.
If for the eurozone and Switzerland the inflation target is below 2%, Australia’s is between 2% and 3%, Norway’s is 2.5% and Iceland’s is 2.5%.
Raising inflation targets would be, therefore, one way of dealing with the problem, in Oxford Economics’ view.
Another way is what President Donald Trump is doing, although I am not sure he deliberately wants to push up inflation: impose tariffs on certain goods imports. Prices are bound to rise if you do that — but it’s debatable whether that will help the economy over the medium term. We’re about to find out, at our own expense.