Tail risks – A surge in inflation looks unlikely | Briefing

IN 1975 Adam Fergusson, a journalist on the Times, published a book called “When Money Dies”. A history of hyperinflation in Germany in the early 1920s, it was written with an eye to what was going on in the then-present day. Inflation in Britain was not at the prices-soaring-day-by-day levels seen in the Weimar Republic. But in 1975 it reached an unprecedented 24%—grim enough for Fergusson’s warning that the experience of inflation was “totally absorbing, demanding complete attention while it lasts” to hit home.

Rapid, continuous increases in prices arbitrarily take wealth away from savers and devalue people’s wages. It is not just the purchasing power of a unit of currency that is eroded; it is the trust in a reliable future on which contracts and capitalism depend. From the early 1970s to the 1980s more than 50% of Americans said “inflation or the high cost of living” was the single biggest problem facing the country.

But by the 1990s the beast seemed to be vanquished. Average rates dropped; so did the number of “inflation surprises” in which the rate spikes (see chart 1). When “The West Wing”, a television show, gave its fictional president a “secret plan to fight inflation” in 1999 it was as a joke, not a plot point. True to Mr Fergusson’s belief that the experience of living with inflation is “forgotten or ignorable when it has gone”, his book fell out of print.

It was republished to acclaim at the end of the 2000s, when post-financial-crisis stimulus packages increased government debt prodigiously, and “quantitative easing”, the process by which trillions of new dollars would be created, started to hit its stride. Many worried that the stage seemed set for prices to surge in a way which had not been seen for a generation.

They did not. Over the 1970s rich-world inflation averaged 10% a year. In the 2010s the rate stayed stubbornly below 2% a year. That is one of the reasons that the small but vocal band of economists and investors that is once again worried about excessive price rises is by and large being ignored. The agenda for a big conference on central banking to be held in February has copious space for financial instability, climate change and inequality but barely any for inflation—despite taking place in Germany, a country which, since Weimar, has all but fetishised sound money.

Indeed a modest rise in inflation, rather than giving central bankers the vapours, would have them sighing with relief. In recent years, and most dramatically during the worst of the crisis this spring, the threat of demand-sapping deflation loomed large, especially in the euro area and Japan. Some want central banks to aim for inflation higher than the 2% target that most of them use, and America’s Federal Reserve has already said that it wants to overshoot its 2% target in the recovery to make up for recent shortfalls. Recent experience suggests that may be hard: interest rates close to zero…