Why we will not have inflation, Volcker-Era or otherwise, in the West for 20 years

Matt Yglesias has a good post over at ThinkProgress on Paul Volcker Denouncing the Return To Volcker-Era Inflation. It’s worth a read, but it misses the bigger picture. Indeed, if I were younger, like Yglesias, I would agree that an inflation rate of 3% is a good thing. It boosts the economy, decreases unemployment, and potentially lifts up your salary. But I am not younger, and furthermore, a big part of the world demographic is older than him or me (i.e., baby boomers) and they hate inflation. If you are a baby boomer, you likely have a limited income based on a pension or savings. You likely already have paid for your house and many of your other major expenditures. You are not all that worried about high unemployment because you are retired. What you are worried about is inflation. You want prices to be stable or even dip if possible. Any politician that supports a policy that drives up inflation is going to suffer. Add that to alot of central bankers that also hate inflation, and what you have is a formula for very low inflation for years, if not decades to come.

Inflationary spikes can come from other sources (e.g. fuel), but core inflation is going to stay low as long as you have a population dominated by older people.

Here’s inflation/CPI for the last 30 years in the US

Volcker and other central bankers in the West broke the back of inflation in the early 80s. Since then, demographics and shifts in manufacturing from the developed to the developing world (i.e. offshoring) have worked together to keep it down. In 20 years there will be a dying off of most of the baby boomers combined with wage increases in the developing world that will work together to drive up inflation. (Also, global warming will affect the CPI). But until then, inflation will stay low for some time to come.


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