“In the short run inflation is an economic phenomenon. In the long run it is a political one” (The Economist, “Economics Focus: A winding path to inflation”, 6/5/2010).
We all know inflation is going to happen. It has been a part of our reality as long as we’ve had fiat currency and politicians willing to spend it. It will always be with us. Economists are constantly pouring over indicators to pinpoint its arrival and how debasing it might be.
The canary in the coal mine that tells us inflation is happening (or already has happened) will be when banks are eager to lend money. Bank behavior is a lagging indicator. Their enthusiasm tells us that a cycle is mature or about to decline and their pessimism reveals that we are about to enter a new cycle of expansion. As with all indicators, this one is imprecise, but viewed with a long-term perspective, it has stood the test of time.
We have survived inflation in the past and shall do so again. As one of my favorite economists, Peter Bernstein, wrote: “Inflation frequently takes the form of a gradually rising price level rather than a runaway explosion of economic chaos”. For the sake of our retirees, I hope it takes its most frequent form rather than its most extreme.