Economists warn of dangers from 'globalised' inflation

Inflation, dormant for a decade, is in danger of returning as a global phenomenon next year, according to an influential investment survey published yesterday.

The authors of the annual Equity Gilt Study at Barclays Capital warn that central bankers may be repeating the policy mistakes of the Seventies, lulled into a false security by a combination of historically unusual disinflation and flawed statistics. American inflation could hit 4 per cent by the end of 2005, they predict.

The study, which examines the performance of different asset classes since 1900, suggests that increasing globalisation could be a trigger for inflation, rather than the deflationary influence more commonly assumed. Tim Bond, co-author, challenged the view that inflation has necessarily been tamed by the additional supply capacity created in new markets in Asia. Inflation has just been globalised, he said.

"There are 2 billion people in the industrialised world but 4 billion who aren't, whose population is growing and who want to join the industrialised world. That creates a persistent demand pressure," he says. The loosest monetary framework for a generation is exacerbating a trend towards greater global economic demand, Mr Bond said, and the US Federal Reserve is not reorienting itself quickly enough after having averted deflation.

He said: "Provided the Fed gets motoring and the Bank of Japan does the right thing at the right time, they should be able to keep inflation in the 3-4 per cent range. But there is a risk that you will get some extraordinary squeezes in some raw materials that translates into something more vigorous."

The Barclays study shows how official statistics find it impossible correctly to measure the gap between demand and supply, and how the official measure of US inflation is distorted. The measure is 38 per cent composed of household rents ­ which have fallen as first time and buy-to-let buyers have increased. The study also argues that the widely used survey of US payrolls is a poor measure of job growth compared with the less widely publicised survey of households, which in recent months has diverged to suggest a strong recovery in employment.

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