The Death of Disinflation?

Roger Bootle famously “called” the decade long fall in global inflation in his 1996 book “The Death of Inflation”. He predicted that globalisation would mean that an individual country could have low levels of unemployment without that generating inflation, as companies would outsource manufacturing (and increasingly services too) to cheaper labour countries.

Previously the academic model (The Philips Curve) had predicted that a fall in unemployment would lead to a rise in prices as a scarcity of labour meant that wages would increase. It’s interesting therefore that in a speech last week Bootle raised the prospect of stagflation in the global economy, suggesting that just as falling unemployment no longer generates inflation, rising unemployment, such as we have in the UK now, might not lead to falling inflation. We could end up with slower growth and higher inflation. We do expect growth to slow in the UK in 2007, as the over-indebted consumer stays home from the shops, and as government spending cuts come through. However, as long as the Bank of England continues to talk tough about fighting inflation they can control inflationary expectations and prevent Bootle’s theoretical nightmare scenario.