The Resurgence of Inflation

Abstract

The great demographic reversal and the retreat from globalisation will bring back stronger inflationary pressures—this is our highest conviction view. Worsening dependency ratios naturally raise inflation. The lesser availability of labour at home and abroad will serve to restore the (previously diminished) bargaining power of labour. It will also end up raising the equilibrium Natural Rate of Unemployment. Households will save less, and invest more in housing, than some mainstream models suggest. The non-financial corporate sector may have to invest more to hold down unit labour costs, though Goodhart and Pradhan are agnostic about the various causes for recent low investment rates. But they doubt that politicians, facing rising health and pension costs, will be prepared or able to raise taxes enough to equilibrate the economy via fiscal policy.