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.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Jim Leaviss

Job Title: CIO Public Fixed Income

Specialist Subjects: Macro economics and fixed interest asset allocation

Likes: Cycling, factory records, dim sum

Heroes: Brian Clough, Morrissey, Neil Armstrong

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