Anyone that has filled up their car recently can see that prices are going up.
Last week The Economist magazine tweeted that "The sharp increase in inflation over the past year has blindsided many economists. Almost no one saw it coming."
That is not true. Many economists warned about inflation over the past year. Unfortunately, not many in our central banks and government agencies listened, instead dismissing rising prices as "transitory".
Others were more worried. In February, Larry Summers (a former US Treasury Secretary) warned that the US stimulus spending could unleash "inflationary pressures of a kind we have not seen in a generation". Olivier Blanchard (a former Chief Economist at the IMF) agreed saying that the spending could start a "fire".
I asked our Treasury officials about these concerns in March and they did not express concerns about inflation. Treasury's advice in the Budget this year was there was room to increase government spending.
Over the past month it has become clear that we had best start worrying about inflation and start worrying about it soon. The US is experiencing inflation rates not seen for 30 years. Australia's inflation is also on the up.
Inflation is the loss of value of a currency, and is ultimately the result of too much money being printed. Since the beginning of the pandemic our money supply has grown by 15 per cent. The Reserve Bank has been lending money cheaply to the banks and has been keeping medium term rates low, not just short term interest rates that they normally do.
The Reserve Bank had to embarrassingly unwind the latter policy (known as Yield Curve Control) last month when the markets successfully challenged them, and the RBA could not afford to keep it in place. There is speculation that the RBA may need a multi-billion dollar taxpayer injection of funds to offset their losses.
Inflation's comeback has come as such a shock to policymakers because inflation has remained suppressed for so long. A book released last year by economists Charles Goodhart and Manoj Pradhan helps explain why that has happened.
Over the past generation, China and the Soviet bloc opened to the world. This brought billions of more people into the industrialised workforce and that put downward pressure on wages and prices even while money growth was strong, like after the Global Financial crisis. However, this process is now reaching its zenith and wages are increasing in both Eastern Europe and China.
Goodhart and Pradhan have also worried that the "war like" spending unleashed during the pandemic could see inflation at "more than 5 per cent, or even in the order of 10 per cent, in 2021." So far their prediction is checking out.
In addition, over the past year energy prices have skyrocketed as the effect of net zero emissions policies reduces the supply of coal, oil and gas. Despite the wishes of woke, western governments, fossil fuels remain in strong demand. Larry Summers recently criticised American central bankers for focussing too much on climate change rather than their job of controlling prices.
Here too it would be better for the RBA to get back to its day job lest we re-produce the 1970s. The 70s were a decade of rising prices, energy crises and high unemployment. We are not in that position yet but unless we get back to a focus on the here and now, and not 2050, it may well be back to the future for inflation.