Inflation

Just ten years ago, the major economies had public debts, which was 15-20 percentage points higher than the debts on emerging market economies (as a percentage of GDP). In three to four years, the difference is expected to increase to as much as 75 percentage points.

There is no easy way out of the debt crisis. The idea is to find a balanced and credible fiscal policy that - at the cost of a short-term poor growth - takes control of the weak state finances without creating long-term adverse effects. What needs to be done include higher income and sales tax, same or reduced wages in the public sector, raising the retirement age and less public expenses.

Many individuals perceive higher inflation as an alternative, a more convenient and attractive choice. With the help of inflation, the nominal value of the debt would disappear. But estimates suggest that the inflation would have to be maybe 20 percent - over time - in order to erode the value of the public debts.

The higher inflation, the greater the risk that inflation becomes self-fulfilling. The world loses control of the situation and a global hyper-inflation may be present. Let us hope that this will remain just a silly idea.

Prognosis show subdued inflation
Our prognosis shows instead a continuation of subdued inflationary pressures. Sure, some countries will experience a bit higher inflation over the next 1-2 years, when increased VAT and tax on among other things such as alcohol, tobacco and environmentally destructive consumption raises consumer prices. But this is not bad enough for the central banks.

In several countries in Europe, for example, forces from high unemployment and frozen or reduced wages dominate the situation. It is part of the policy that is designed to create so-called internal devaluation. In some countries such as Spain, the policy is a threat to the property market that so far has fallen by 15 percent. There is basically no room to lower the already record-low interest rates set in Frankfurt by the ECB. That is why the Spanish real interest rates will go up and housing prices will go down.

Some proposals have been made. For example that Germany would ease the situation for PIIGS countries in particular by allowing German wages and prices to rise; internal revaluation. Well, it does not seem to be a very good idea.

Even in the U.S., the underlying inflationary pressure is under control. Unemployment is twice the normal level and with a stronger dollar, the imported inflation will decrease.

The concern about inflation in China is excessive. Last week, the inflation in May was 3.1 percent, the highest level in 19 months. The underlying inflation is at 2 percent and China wants to limit the monetary expansion. An increase in inflation may lead to greater pressure on the efficiency in a large but still inefficient economy. Higher productivity keeps the inflation away.

In Sweden, we have a stronger krona and improved productivity and decent wage contracts which decrease the inflationary pressures. The conclusion is that it will not be inflation that is identified as the main reason for the increase in interest rates that the State bank obviously want to implement in a few weeks.

Inflation is very much a global phenomenon in these globalized times. Today, there is still spare capacity. Commodity prices are under control. Probably, the central banks are secure due to the fact that there is a discussion on inflation at the moment. The fear of deflationary expectations is still present, especially in Europe.