Inflation denial

Since the financial crisis hit its latest crescendo, I have been struck by the sudden surge in inflation denial. There is a mistaken belief that just because a couple of banks have collapsed, price growth will suddenly moderate.

If only bank crises worked in that benign way. We are one year into this crisis, and inflation has gone up, not down. Currently, the UK CPI inflation rate is 4.7 percent.

This should be no surprise to anyone who takes a glance at monetary growth data. UK money supply growth actually picked up a little over the summer. For central banks, a higher inflation rate is part of the answer to the banking crisis. Rapid inflation reduces the real value of debt and therefore makes debt servicing more manageable for borrowers.

The deflationists haven't factored in the impact of the the world banking bailout that is now being organized by the world's central banks. The key idea behind the US banking bailout is to pull out all those dysfunctional assets out of US balance sheets so that the banks can start creating credit again.

Interest rates provide a further reason for believing that inflation will be with us for quite some time to come. In real terms, policy rates are either negative or close to negative.

Finally, central banks on both sides of the Atlantic have spent the last year pumping in unfathomable amounts of monetary base into the world economy. Give this huge monetary loosening some time and we will see inflation take off like a rocket.