INFLATION – The Six, Powerful, Slow Acting Forces
There has been much talk of a return to inflation which has only picked up pace if you are fan of financial market news and podcasts. Whilst a lot of the conversation focuses on the Federal Reserve, global money printing by central banks and more recently the record fiscal spending, there seems to be less attention being paid to some of the slower acting forces.
To overcome the past 40 years of deflation would require a force greater than the big deflationary tailwinds of technology and demographics. The idea of the Six Slow Acting Forces comes from an interview by Joseph Walker with Ian Macfarlane, the former Governor of the Reserve Bank of Australia from 1996 to 2006. Listen to it here.
He talks less of monetary policy (whilst of course acknowledging its impact), but instead of six underlying characteristics of the period from the mid 1960’s to the end of the 1970’s that seemed to spur inflation. You do not necessarily need all these forces at the same time to create persistent inflation, and each in isolation does not create inflation. As economies move through the business cycle the forces ebb and flow but the direction of travel is still the same. Macfarlane acknowledged there were six forces generally in place over that period.
The six forces, in Macfarlane’s view, relate to the period from the of the mid 1960’s to the end of the 1970’s:
1) Strong Economic Growth
2) Rising wages in line with inflation
3) High Levels of Trade Protection
4) Little to no competition from Developing Markets.
5) Ability for business to operate at cost plus, that is they had pricing power.
6) Inflation Expectations were elevated.
There are of course other factors over that period such as demographics and the oil price shock. However, you could argue the demographics drove the growth and the oil price shock drove the change in inflation expectations.
Please see the detailed report at the Mileura website.
