When the global economy tanked in March 2020, the rate of inflation looked like it was heading to zero. That made it a surprising moment for former U.K. central banker Charles Goodhart to predict that inflation would hit between 5% and 10% in 2021—and stay high.
“The coronavirus pandemic will mark the dividing line between the deflationary forces of the last 30 to 40 years and the resurgent inflation of the next two decades,” said the 85-year-old economist in an interview. He predicted that inflation in advanced economies will settle at 3% to 4% around the end of 2022 and remain at that level for decades, compared with about 1.5% in the decade before the pandemic.
He argued that the low inflation since the 1990s wasn’t so much the result of astute central-bank policies, but rather the addition of hundreds of millions of inexpensive Chinese and Eastern European workers to the globalized economy, a demographic dividend that pushed down wages and the prices of products they exported to rich countries. Together with new female workers and the large baby-boomer generation, the labor force supplying advanced economies more than doubled between 1991 and 2018.
Now, he said, the working-age population has started shrinking across advanced economies for the first time since World War II, and birthrates have declined as well. China’s working-age population is expected to shrink by almost one-fifth over the next 30 years.
The beauty of the above theory is that we can mark our calendars to test it! I propose January 15, 2028. At least currently, the BLS releases CPI numbers on January 12. The economy is subject to heavy manipulation by politicians seeking reelection, but 2027 won’t have been an election year.
How about we say that this guy is a genius if inflation has, in fact, run at an average rate of higher than 3 percent for the period January 2021 through December 2027? I don’t think it is fair to demand that be held to the 4 percent upper bound due to the fact that desperation and incompetence among politicians could easily result in some months or years of runaway inflation. I’m going to schedule a blog post for January 15, 2028!
With houses in any reasonably desirable neighborhood going up by 20-50 percent per year, you might argue that betting that Charles Goodhart is correct is too easy. But the WSJ mentions some naysayers.
A central criticism of Mr. Goodhart’s thesis is that countries with more retirees and fewer workers, such as Japan, have the opposite problem—very low inflation rates.
(Wikipedia says that he has a Ph.D. from Harvard is an professor emeritus at LSE, but he is “Mr. Goodhart” rather than being presented as a colleague of Dr. Jill Biden, MD, PhD.)
I’m prepared to love Professor Dr. Goodhart because he references the Black Death in responding to the above criticism:
Mr. Goodhart argued that workers likely won’t save enough for their retirement, and that pensioners consume more than they produce, especially with healthcare. The dwindling pool of savings, combined with increased corporate spending to secure supply chains and make up for a lack of workers, will push up interest rates, he predicted. He said the Black Death, a 14th century pandemic, triggered a quarter-century of soaring wages and rampant inflation.
- Immigration is the Reverse Black Death?
- Movie suggestion: Black Death
- Black Death lesson: immigration will discourage women from working
- Lessons from the Black Death regarding coronavirus
- Academic lectures on a modern subject: the Black Death
for my own Black Death obsession.
If Goodhart is correct, anyone who doesn’t take a fixed-rate 30-year mortgage offered at 3.25 percent is going to feel stupid!