We are in the midst of an inflationary boom. Many people have increased their incomes without increasing their output. Inflation was never going to be temporary with $17 trillion of new incomes and little increase in output. A good proportion of this money is still waiting to be spent. Already inflation is reducing its purchasing power, but we should expect consumer spending to run well above consumer incomes for the rest of this year, and into the second half of next. Beyond mid 2023 it gets tricky because today’s money supply drives future output and incomes with a lag of up to two years .
The author mentions that inflation will continue to remain high until next year. One reason for his predictions is that the amount of money in circulation has increased significantly. The amount of money in circulation was 14% in the UK and 25% in USA last month, but this has now reduced due to central banks ceasing their creation of new money themselves. This means that there will be no more new money created by these banks, with all future growth being entirely up to commercial banks, who will draw down current cash reserves held with them by businesses and households.
The current rate of inflation has been forecast to continue for the next 6 months, with growth in the UK slowing to around 1.3% at the start of this year. This might feel like an attempt to scare you into spending less. However, if you are an owner-managed business which has been trading well during Covid-19 Pandemic and have little or no debt, it is likely that you will continue to invest and expand as you will be naturally optimistic.
Household spending on goods and services is expected to slow gradually over the next 18 months but this will not trigger a recession. The reason for our confidence is that global growth is currently buoyant and unexpectedly strong in the UK too. Given this, we expect inflation to peak at 3 per cent next year, so wages will rise faster than prices. If this happens, households’ real incomes will rise sharply. After 2022, we should see consumer desire to save start to increase meaningfully as confidence begins to return and economic growth continues at around 2.7%.