Conventional wisdom suggests that the spectre of inflation has been defeated by the economic policy innovations of independent central banks and inflation targeting mechanisms. Indeed, despite prices of many types of goods and services currently rising – and expected to continue rising – as discussed in a recent post, many still believe that deflation is a greater risk than inflation. This seems to be supported by the chart below, which shows how the value of £1 has changed between 1948 and 2010. We can see that £1 in 1948 is now only worth 3.4p in real terms, though it does appear that inflation has not been an issue for a few decades.
The above chart seems to suggest that the phenomenon of inflation was at its worst up until the late 1970’s and that since then the problem has largely been conquered. However, if we plot the chart using a logarithmic scale – which shows percentage rather than absolute changes – we can see that although inflation was at its highest during the 1970’s and 1980’s, the last twenty years have seen a significant debasement of sterling, with its value falling from 6p (in 1948 terms) to 3.4p, a loss of 43% of its value.
Even if we assume that the Bank of England is successful in hitting its 2%pa CPI inflation target over the next twenty years (something which is open to debate given its recent record), this would still mean that sterling would lose another third of its value – not a trend particular helpful to those currently living off fixed incomes (most likely to be the retired) or those saving for retirement in twenty years’ time. In my view, the policy of targeting inflation of 2% per annum represents the systematic debasement – or theft – of the savings the the UK population by the government in order to pay its debts.
- “Why is anyone surprised we have inflation?” and related posts (johnredwoodsdiary.com)
- BOE’s Bean: Could See More QE If EMU Debt Crisis Has Bad End (forexlive.com)
- Weak pound ‘hitting expats’ (lv.com)
- UPDATE 2-Slower UK growth may warrant more QE – BoE’s Bean (reuters.com)
- Food And Drink Costs Push Up Inflation Rate (news.sky.com)
- Sterling at six-week high after inflation report (ft.com)