How long will inflation stay low ? Have we entered a new age of low inflation , slower growth and sluggish employment ?

The question on many people’s minds in the financial and futures markets is all about judging the future inflation rate. Inflation has not been a problem for most of the past decade and certainly not a problem since the crash of 2008 which is now approaching six years ago. What the crash and slow recovery and quantitative easing has demonstrated is that inflation is not an automatic response to monetary ease, contrary to what followers of Milton Friedman believe. This is what Keynesians like Nicholas Kaldor always argued, particularly in his polemic The Scourge of Monetarism intended as a rebuttal to Friedman. This is what I also believe after having examined Canadian data over a forty year time period between 1950 and 1989 on the relationship between the rate of inflation as measured by the GNE deflator and the ratio of central bank monetized debt and the broadly defined money supply. Contrary to what one might have expected following Friedman there was no consistent correlation between the two variables. There were years where the ratio of monetized debt was very high but inflation was low and fell further in subsequent years. On the other hand there were high rates of inflation as the ratio of monetized debt fell to lower levels. This suggested to me that inflation was due to other factors than pure monetary policy.(See Harold Chorney, “A Regional Approach to Monetary and fiscal Policy ” in JMcCrorie&M.Macdonald, The Constitutional Future of the Prairie and Atlantic Regions of Canada, Canadian Plains Research Centre, University of Regina, 1992; and Harold Chorney , Debts, Deficits and Full Employment” in Daniel Drache & Robert Boyer, Eds. States Against Markets, The Limits to Globalization, Routledge, 1996; and Harold Chorney,”Keynes and the Problem of Inflation,paper originally presented to a conference on la théorie générale et le keynésianisme Université de Montréal, Feb. 1987 published in G. Dostaler et G.Boismenu, la théorie générale et le keynésianisme Montréal, ACFAS, 1987.)

Now as the Fed pares back very gradually its QE, what are we finding out about inflation ? Disinflation as opposed to inflation is the concern. In other words the rate is too low in the U.S. and in western Europe and has been too low for a long period of time in Japan although the situation may be improving there in recent months.The current rates are: Canada 0.9 % ; the U.S. 1.5 %; U.K. 2.0% France 0.7; Germany 1.43%; Italy 0.66 % Japan 1.61 %.

This does not mean that there never can be inflationary pressure as the recovery takes hold but it appears for the forseeable near future inflation is very weak and unlikely to be a major problem for some time to come. Hence my earlier admonition to the Bank of Canada to hold off raising rates and even consider cutting them so long as unemployment creeps up and growth is tepid.

The great recession has left little room for the time being for price rise. Instead we have to concentrate on repairing long neglected infrastructure , particularly here in Quebec where today one of the Montreal school boards announced that a third of the schools need long overdue repair and where we have had ongoing issues with highway and bridge safety. Employment creating investments are what is needed and there is no shortage of projects to be tackled.

When all the necessary investments have been made and the unemployment level drops to reasonable levels below 5 % then we can turn our attention to inflation.


About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
This entry was posted in business cycles, Canada, European unemployment, fiscal policy, J.M.Keynes, Milton Friedman and NAIRU, monetary policy, U.S., Uncategorized, unemployment and tagged , , , . Bookmark the permalink.

2 Responses to How long will inflation stay low ? Have we entered a new age of low inflation , slower growth and sluggish employment ?

  1. circuit says:

    Nice post! What do think of the view that low nominal interest rates are not a sign of easy money. MSo-called market monetarists like Scott Sumner hold that view. Accordingly, they believe, much more QE is necessary to get the economy back on track (via the portfolio rebalancing effect).

  2. Thanks for your comment. Your own blog is a good one with some good stuff on Steindl, Kalecki, Robinson and post Keynesians well as that nice link to Paul Samuelson explaining how it was massive defict spending that rescued the U.S. from the depression. Clearly it is possible to have near zero interest rates but if the deflation prevails these low rates in real terms will be higher rates. Thats precisely what happened during the early years of the great depression of the 1930s. the central banks lowered their rates somewhat but not nearly low enough to offset deflation that prevailed. I agree with Scott Sumner that more quantitative easing would be useful but it needs considerable support on the fiscal side to maintain and accelerate the recovery. There are cyclical aspects to any recovery but there is no doubt that austerity can and will undermine it and that the hoarding of money supplied can be a serious barrier to QE being a stimulus.

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