Meet the Inflationists

Peter Warburton - 01 March 2018

Presidents Trump and Xi, prime ministers Abe and Modi, hold in common an urgency of purpose and a disregard for obstacles. Excepting President Xi, who has already moved to consolidate his power and extend his term, these leaders face not-too-distant electoral challenges and the ever-present threat of removal by fair means or foul. They are under no illusions that their time may be cut short. For a variety of reasons, each of them is engaged in a dash for growth that has blinded them to the potentially inflationary side-effects of their policies.

President Trump imagines the US as a Lilliputian Gulliver, pegged to the ground by regulations and onerous taxes. He believes, so far as one can tell, that by lifting these burdens, the natural vibrancy and dynamism of the American economy will burst forth. No matter that the jobless rate is at 4.1 per cent and unfilled job vacancies are at a record high: the President has secured a massive, front-loaded tax-cut that he believes will deliver the faster pace of growth he craves.

President Xi is determined to maintain China’s growth trajectory at all costs. The promise of rapidly elevated living standards is essential to preserve the cohesion of this vast, diverse, but poor, country. No matter that productivity growth is fading and resources are misallocated on an epic scale:  President Xi is committed to the elimination of all constraints. Locked into a planning mindset, he is oblivious to the inflationary implications of an ailing supply side.

Prime minister Abe, being granted a rare second chance, considers himself a man of destiny. He is on a mission to defeat the deflationary dragon and drag Japan, kicking and screaming, into a new technological age. He welcomes the arrival of inflation with open arms and insists that his policies will lean in this direction until the inflation rate overshoots its 2 per cent objective.

Prime minister Modi, aware of India’s record of economic underperformance and the huge weight of expectation on his shoulders, has embarked on a series of radical modernising reforms, whose full impact has yet to materialise. Modi has yet to address the food supply issues that underlie the swings in Indian inflation.  Modi rode a disinflationary tide for the first couple of years as PM, but now inflation has returned. His desire to restore economic growth, following the DeMo hiccup, conflicts with the tighter monetary policy that has become appropriate.

The varied ambitions of these four leaders, governing a combined population of 3 billion people and presiding over half the global economy, have tilted the world in an inflationary direction. Monetary policy has become deeply political in all these countries, as their central bank incumbents are all too aware. The Inflationists are coming to a delivery depot near you.   

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