Swimming Against the (Main)Stream

Abstract

From 1750 until 1950 inflationary expectations, and nominal and real interest rates, remained roughly constant, in the UK at least, while inflation was a function of occasional wars and the vagaries of harvest. After the 1950s there was a strong upwards trend in inflation, inflationary expectations and nominal interest rates (1950–1980), followed by an extraordinary downwards trend in inflation, inflationary expectations and both nominal and real interest rates (1980–2020). The earlier trend can be ascribed to a doomed, but well intentioned, attempt to keep unemployment below its rising Natural Rate, with the monetary regime allowing that to happen. The subsequent downwards trend is ascribed by Goodhart and Pradhan to underlying demography and globalisation factors. Given the expansionary intent of monetary policies, it is hard to claim that such disinflation was a monetary phenomenon. But in that case the forthcoming reversal of the previous demographic and globalisation trends should lead to a revival of inflation and nominal (but not necessarily real) interest rates. But this view is at odds with most current mainstream analysis, even of those who do focus on demography, who generally continue to foresee secular stagnation, ‘lower for longer’. Goodhart and Pradhan outline why they differ from the mainstream. Their view of the future is not encouraging, but it is coherent and plausible.