Orthodox economic theory has it that recession is basically deflation, and since inflation is the opposite of deflation, inflation was supposedly impossible during a recession.

This was proved to be total nonsense in the 1970s when recession was accompanied by runaway inflation – “stagflation”. Indeed, the inflation and the recession fed off each other.

So the media hype about low inflation figures, like those in the United Kingdom last week, should not be taken as a signal for general rejoicing that “at least we don’t have to worry about inflation.” 

On the contrary, there are a lot of inflationary pressures in the system:

1   Fiscal deficits in response to the recession are inflationary because they are financed by governments dumping money, either in the form of bonds or newly printed cash, into a static economy;

2   In the longer term, most commodity prices will rise because supply of natural resources is limited but demand is increasing with population;

3   Policy-makers are so obsessed with the dangers of deflation that they have taken their eye off the probability that their shock therapy, especially the unsustainably low interest rates, will lead to inflation;

4   Government initiatives have done little or nothing to reduce business costs, which may actually be increased by higher taxes to pay for those deficits, putting further pressure on prices;

5   Recent inflation figures may be artificially low because retailers have been offering customers unsustainable discounts just to keep cash flowing and get rid of stock;

6   In economies, like the United Kingdom, which have experienced substantial currency depreciation, the higher cost of imports will drive up prices; and

7   Despite the headline figures, many prices are actually increasing – note in particular that, despite the low nominal interest rates, the rates actually being paid by small businesses are very high.