Inflation Has Been Rising

In this article, I will discuss the global rise of inflation. Normally the level of inflation we’ve see globally wouldn’t be a big deal because it is still relatively low. While I think inflation targeting is a bad policy for central bankers to pursue, I would never go as far as saying if they achieve their goal there will massive problems. Wanting to achieve 2% inflation is a silly goal because inflation is constantly vacillating, but having this level of inflation isn’t necessarily a disaster. The reason why inflation increases are bad in this current scenario is because the central banks have been orchestrating extraordinary monetary policies which will be forced to stop.

Because central bankers view inflation as synonymous with growth, they want it. Inflation to them signals strong demand. However, if you’re devaluing the currency to increase inflation are you really creating strong demand? Regardless of the rationalization of these policies, it’s important to understand the negative effects of inflation. Inflation hurts the consumer and it makes it more expensive for governments to finance their deficits. The quantitative easing programs are supposed to help stabilize the economy. They are deemed to be inflationary. However, instead of rolling them back, governments are going to need them more than ever to avoid deficits running out of control. If QE is forced to resume, it will look even more like debt monetization than before.

The ECB is currently buying $80 billion in bonds per month. It will taper this buying to $60 billion per month from April to December. In the summer, when the decision is debated, the options will to be to do another taper or end the program completely. The reason why I mentioned the current program is because European bonds had the worst January on record. The chart below shows the historic selling in European bonds. That’s quite an accomplishment with the ECB buying $80 billion. Imagine how bad this would have been if the ECB didn’t have the bond buying program. That’s certainly a possibility starting in January 2018. Judging from the rhetoric out of policymakers, they would view this bond selling and increased CPI, which has reached 1.8% in January, as evidence QE was a success. With the extraordinary debt to GDP levels of southern European nations, higher government bond yields start to cause problems very quickly.