Inflation's going to rear its head again: Epic money printing through QE is going to cause a spurt of price rises

Annabelle Williams
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QE expands the monetary base, which some economists believe leads to inflation (Source: Getty)

Inflation, the silent force that raises prices, could be coming back with a vengeance.

Whether it’s a pernicious tax that erodes ordinary people’s purchasing power or a necessary part of healthy economies is still open for debate. But inflation has been around since ancient times. The price of barley spiked in Babylon during the reign of Alexander the Great, and later during the Roman empire too.

There’s a couple of schools of thought around why prices rise – and both are now suggesting that higher inflation is on the cards.

Read more: Opinion - inflation is an undemocratic stealth tax

Consumer price inflation has been low, hovering around the 0-0.5 per cent level in Britain since December 2014, and that’s been mostly attributed to the spell of cheap oil. For the year as a whole it's forecast to be 0.3 per cent.

Brent crude halved in price from $100 a barrel in June 2014 and continued to fall, touching lows of $27.80 in January this year. Consumer price inflation fell in the UK, and cheap oil kept inflation muted in the US too.

At the same time, though, core inflation - which strips out volatile food and energy prices - has been higher, and was standing at 1.2 per cent in February.


Followers of Keynesian economics argue inflation is caused by a multitude of factors including commodity prices, rising employment, demand for goods, government spending and pay increases.

At the moment, oil prices seem to be stabilising – at $39 a barrel currently – and some say they’re heading upwards. Wages and other underlying price pressures are picking up – particularly in the US, with the UK following behind. This all points to the return of inflation.

“Although the data overall might not be pointing to much higher inflation in the short term it is wrong to write it off completely,” says Nathan Sweeney of Architas. “With more people working and more spending we will see the return of inflation at some point and it is right to be prepared.”


But there’s another theory too. Massive money printing through the QE programmes of central banks in the US, UK and, more recently, the Eurozone and Japan, was designed to stimulate inflation.

Astronomer Copernicus was the first to suggest that increasing the supply of money raises prices, and the theory’s cropped up continually in the 500 years since he lived.

It’s an idea traditionally held by monetarists, the school of thought made famous by legendary economist Milton Friedman, which suggests governments can control inflation. The theory played out with hyper-inflation during Germany’s Weimar republic – but critics argued there was much more at play than monetary theory.

This monetarist view hasn’t always predicted inflation and the oil price shock has kaiboshed it too.

But now the idea is slowly spreading, that the cocktail of rescue measures put together by central banks since the financial crisis – including the trillions of money printed – are going to mean saying goodbye to those less than 1 per cent price rises.

“If QE doesn’t put upwards pressure on inflation, why are they doing it? Central banks know that it does cause inflation,” says Gary Reynolds of Courtiers Investment Management. “It is a very real worry.”

“We have assumed that ultimately inflation would be the side effect of all the bad medicine administered by the central bankers. We are now more convinced by this,” says Tom Becket of Psigma Investment Management. “The chances are that inflation pressures are set to build.”

Reynolds says the real question now is not whether inflation will appear, but “how fast can they turn the tap off?”

“The experience of the 1970s is they can’t. Inflation can come and get you very quickly because before you realise it the economy can’t respond very quickly to it,” he says.


For savers, cash is the worst kind of safety net in a spell of rising prices as its value is eroded by inflation.“If you are looking for crude protection measures you can buy inflation-linked bonds. And often the best time to buy these is when no one else is, which is right now,” says Architas’s Sweeney.

“Regardless of whether inflation is the answer or not, you can’t lose much with such instruments and it offers proper inflation insurance,” Becket adds.

Specialist property funds which invest in commercial buildings, retail and office space could also provide inflation-linked returns as well as capital appreciation, Sweeney says.