Friday, 11 January 2013

The fuse has been lit

We have had a relatively benign run on inflation in the UK and the West generally since the credit crunch. Since 2008 deflationary pressures have been enormous as Governments slash spending and the private sector continues to pile up cash surpluses, so the outlook should be set fair. This is reinforced by the stunning turn-around in the US energy situation (US imports of oil down to the lowest level for 25 years) and the resulting flattening of oil prices.

But the first storm clouds are bubbling up. In the emerging BRIC economies the spectre of inflation is now casting its shadow, bad news from Brazil and China this week confirms this picture. The over-use of quantitative easing to balance spending cuts in the West and some massive stimulus packages (Japanese prime minister Shinzo Abe unveiled a Y10.3tn $116bn package yesterday) may be about to throw some lighter fuel on the fire. In the US Kansas City Fed Reserve President Esther George warned that the Fed's near-zero interest-rate policy could spark inflation.


Central bankers are under so much political pressure to target growth rather that maintaining a prudent approach to inflation and this could be a very expensive mistake.




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