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Why the era of low inflation could last for 50 years?

Summary:
Lord Meghnad Desai in this OMFIF piece: Have we entered an era of zero or even negative inflation? If so, what are the reasons and how long will it last? Certainly, the link between government borrowing and inflation is broken. Is this low inflation phase an exception or is it the new ruling financial environment? I am going to stick my neck out and say it will last for 50 years. The elements of the low inflation economy have been maturing over the last 50 years – since the collapse of the dollar standard and oil price shock. Manufacturing has moved to Asia, away from developed countries. Services, transformed by technology, are enjoying rising productivity with better products being sold at lower prices. The prospect of inflation caused by the growth of unit labour costs is

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Lord Meghnad Desai in this OMFIF piece:

Have we entered an era of zero or even negative inflation? If so, what are the reasons and how long will it last? Certainly, the link between government borrowing and inflation is broken.

Is this low inflation phase an exception or is it the new ruling financial environment? I am going to stick my neck out and say it will last for 50 years.

The elements of the low inflation economy have been maturing over the last 50 years – since the collapse of the dollar standard and oil price shock. Manufacturing has moved to Asia, away from developed countries. Services, transformed by technology, are enjoying rising productivity with better products being sold at lower prices. The prospect of inflation caused by the growth of unit labour costs is therefore, in the west at least, negligible. Rising oil prices are much less of a threat, thanks to the growth of alternative energy sources. Agricultural prices may persist as occasional sources of price shock, but they will be local or short lived.

Demographic growth is slowing down and, in some economies, labour shortages may yet cause problems. But the age of robotics is already with us, and the pandemic will encourage production by bodies unlikely to get sick or spread infection. Artificial intelligence is also supplanting skilled labour in many activities.

Should we suppose that we have entered an inflation-free world? One where money can be created by a click on a computer at the central bank, and no inflation follows. Could we afford a welfare state without a large tax burden? How would the global economy be reorganised? These are the next questions we will have to address if we truly have entered a new economic era.

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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