“Three reasons to expect higher inflation: Our inflation view is based on three pillars, which we discuss in turn:
• We think that most observers vastly overestimate both the size of the ‘output gap’ and the importance of this gap for determining inflation. Our earlier research has shown that global factors, rather than national output gaps, are the main determinant of inflation these days.
• The ‘secular’ global forces that helped to push inflation lower or keep it low over the past couple of decades – productivity, deregulation and globalisation – will likely be less prevalent in the years ahead.
• Quantitative easing (QE) is in full swing globally, and we think that central banks will be slow to exit from it collectively, especially if economic growth remains subdued. The longer super-easy global monetary conditions remain in place, the more likely it becomes that inflation expectations and actual inflation will start to rise significantly.”