Price inflation has softened recently in a number of countries. Headline price inflation in the U.S. has slipped from 4% p.a. to a little under 3%, in the eurozone from 3% to 2.7% and in the UK from over 5% to 3.4%. China’s non-food and producer price changes have actually moved into negative territory. India and Russian inflation numbers show a decline from recent peaks of around 15% to the 6%-8% range. Agricultural and industrial metal prices have dropped about 20% from the peaks of a year or so ago. So, from a close up snapshot, one could ask, “Where is the inflation problem?” However, that misses the point. Price inflation is all about excessive money, credit and fiscal deficits. When they work their way through the system, prices go up. The key variable is the time lag.
The two quotes above make four important points. First, there are several kinds of inflation. Second, debt (or credit―the other side of the ledger) is deeply involved in inflation. Third, debt moves restlessly and relentlessly beneath the inflation process, as we have seen in recent years. Fourth, inflation is a monetary phenomenon. In examining prospects for future inflation, it is critical to understand these conceptual issues. Here, we will just touch on them. The interested reader can get more depth in the first few chapters of The Great Reflation.