For the past two decades, inflation seems to have been a low priority for most, except central bankers who have seen their loose monetary policy hardly encouraging economic growth in Western economies. Investors in the US and Europe are now pricing in a 1.75 per cent inflation over the next decade. Is the killing of inflation – the bogeyman of the 1970s and 80s – a reason for celebration?
Globalisation and low-interest rates have kept personal consumption price inflation low. For instance, we can now rely on the prices of electronic goods not shooting up excessively because China keeps producing these goods at very reasonable prices. But the same cannot be said about other items of household expenditure.
In the US, medical care rates have been increasing by five per cent every year, partly because of the ageing population. It is, therefore, no wonder that private health insurance costs keep escalating at rates that are much higher than the consumer price index indicates.
Countries like the UK and Malta that have a public healthcare system that is free at the point of delivery are incurring steadily increasing costs to cater for the growing demand for public healthcare services that have to be financed by taxpayers’ money.
The same applies to housing. Low-interest rates have encouraged more house building as well as investment in buy-to-let property. The effects of higher housing costs only gradually affect the retail price index. For those who want to buy their first property house, price inflation can indeed be an insurmountable hurdle.
One stark reality that politicians fail to discuss openly enough is that low inflation is hiding a worrying fact – that of a widening gap between the haves and the have-nots in Western societies.
Central banks have pushed interest rates to record lows and purchased assets such as government and corporate bonds. This has inflated the prices of equities, bonds and property to unprecedented heights. But how many people benefited from this bonanza?
For most people, work is their primary source of income. In the last decade, despite falling unemployment, wage increases have remained low and nowhere near the inflation of asset prices
Middle- and high-income people in the Western world have gained most from asset-price inflation as many of them have fat portfolios of such assets. But this sector is not representative of the whole of society. For most people, work is their primary source of income.
In the last decade, despite falling unemployment, wage increases have remained low and nowhere near the inflation of asset prices. The Phillips Curve – the theoretical relationship between unemployment and inflation that stipulates that as unemployment falls, inflation must rise – is proving to be quite defective.
Central bankers have perhaps given too much attention to stoking consumer price inflation in the belief that this would lead to economic growth. But they have done little to control asset price inflation that is creating new social problems.
A study by the IMF’s Fiscal Affairs Department sheds light on this problem. It argues that, while global inequality has fallen over the past decades, inequality within countries has increased. The push toward outsourcing as part of the cost-cutting strategy that most Western businesses adopted has meant that low-paid jobs have been transferred to poorer countries by companies in advanced economies. This phenomenon has meant fewer job opportunities for the less-skilled workers that have been forced to accept lower wages.
Besides limiting the pool of jobs available for people with low qualifications, this situation has reduced the bargaining power of trade unions. It has also seen the rise of the ‘gig economy’ encouraged by so-called disruptors who rely on workers defining themselves as ‘self-employed’ to give themselves a better chance of earning a living.
These labour market changes are having a more significant impact in larger European cities where opulence coexists with deep poverty. The Trust of London is a charity focused on inequality in the British capital. A recent study found that 27 per cent of Londoners live in poverty, with the high cost of housing being the main culprit. No wonder that murders and severe street violence in London have become a grave social blight.
The shrinking ranks of the haves and the widening ranks of the have-nots is also giving rise to populism in politics. Populists wrongly blame immigration for this phenomenon. Soon we will discover that if left unaddressed, populism will end up harming everybody, including the rich because it will lead to government policies that destroy wealth rather than create it.
It is high time that governments start to shift the burden of taxation from work to wealth.