A member of the Bank of England’s Monetary Policy Committee believes that inflation has been driven ‘by higher food and energy costs’; and the head of the European Central Bank fears that ‘global commodity prices’ will put short-term upward pressure on inflation. Similar judgments could be cited from a majority of policy-makers and economic pundits.
Such commentaries are founded upon the cost-push inflation thesis which derives from Keynesian economics. Keynes had advised that ‘an increase in the quantity of money will have no effect whatever on prices, so long as there is any unemployment’; but that notion ought to have been thoroughly discredited by the experience of stagflation in the 1970s. The co-existence of high unemployment and escalating inflation together with the impotency of prices and incomes constraints were then a vindication of Milton Friedman’s prescient warnings.
The alternative demand-pull thesis warns that inflation follows if ‘too much government paper chases too few goods’. Such a description applies in varying degree in the UK, USA and across Europe. Although UK initiatives on ‘fiscal consolidation’ are right-minded, by recent, current and prospective levels of state borrowing the ratio (to GDP) of UK national debt will continue to rise. The implication is that demand-pull inflation is inevitable. Within that process, rising energy costs, commodity prices and changing currency values are but the symptoms of a monetary process.
So how can so many economists be wrong-headed? The simple explanation is that macroeconomic forecasts are based upon Keynesian models of national income determination. No other construct purports to serve that purpose. Although the ‘services’ which such models provide have all the characteristics of snake oil, this is no impediment to the economist mountebanks who continue to enjoy their comfortable living, whether as commentators or policy advisors.