Scourge or Saviour: The return of inflation

The lack of inflation in our economy of recent times has been something of a scourge for many. Those reliant on fixed incomes or rental incomes from industrial property have seen their incomes plummet, and money as a tool in itself for generating income, almost worthless with many bank deposit rates under 1%. But all that may be coming to an end in the mid-term future, with the shadow of increased inflation creeping over the horizon.

Whilst inflation within the Reserve Bank recommended band will have a number of positive impacts – amongst them a gradual increase in interest rates – there will be those who can recall double digit inflation. And that recall is generally not with fondness. An interest rate increase will be positive for both those on fixed incomes, and in slowing residential property price inflation.

One of the key, and concerning, aspects of inflation is that it is often a spiral. Product and ingredient shortages, labour shortages and skill shortages are already creating upward pressure on prices. Add to this labour market pressure for increased wages (very often justified when we consider the massive increase in both inequality and benefit support handed out) and doubtless we will see substantially more inflation in the next 18 months than we have seen in the past few years.

But then the spiral kicks in. As the cost of living rises, so too does the pressure for increased wages to compensate. And the quicker the rise in inflation, the steeper the spiral curve.

Whilst we might currently welcome some inflation, the challenge will be for a Reserve Bank with a restricted toolkit, and an impotent government, to ensure it is not rampant and uncontrolled. When we add in the very real possibility of “stagflation” (inflation without any compensating productivity growth) then we can certainly forsee the end of the golden weather in our future.