Do we describe it as a fire? We often point to things that "ignited" it and we seek measures that "dampen it down" rather than those that "add fuel to it".
Do we describe it as a kind of wild animal that is "eating into" our income and needs to be "tamed"?
Sometimes we describe it as a kind of enemy that we should "pre-emptively attack" with inflation-fighting "weapons".
Is it a racer that wages need to "keep pace with"?
Is it a kind of machine that "chugs along" on an "upward track" and is in danger of "running too hot"?
These metaphors are widely used but none of them perfectly sum up what is a very complex phenomenon. But the paper got me thinking about the importance of how we talk about inflation in a world where narratives have become so powerful.
One troubling complexity is highlighted by the second piece of research I found and this one is authored by actual economists (very serious economists in fact). Former Treasury Secretary Lawrence Summers along with Judd Cramer and Marijn Bolhuis examined the change over the years in the methods we use to calculate inflation. Many readers may not know that the effect of interest rates on the cost of making mortgage payments was included in the US CPI until 1983, and in the NZ CPI calculations until 1999.
Households in owner-occupied housing were seen as providing themselves with shelter by making payments of principal and interest, so these were used in the calculations rather than what it would cost to rent the same house. It was kind of an investment approach rather than a consumption approach to measuring the cost of shelter.
This methodology caused inflation in the past to rise higher than it otherwise would because rising interest rates, the very medicine used to treat inflation (more metaphors, sorry), would push up the measurement even further. Conversely, once the curative treatment was in place, the measured inflation rate would then come down much more quickly as interest payments declined. In contrast, today's inflation is high without the artificial boost from higher mortgage costs and may not recede as fast once the patient is cured. This suggests that the struggle may not be over as soon as we hope.
So, I have started using a new metaphor for thinking about and explaining inflation. One that captures its unpredictable and defiant aspects. We should think of inflation as a Jack-In-The-Box. This well-known children's toy dates from the 14th century and typically involves a clown or jester that pops out when the lid opens, which happens either when the melody ends or even at random times (now that's a tick in favour of its relevance). In France it is called "Le diable en boite". Literally, it is a devil in a box.
When there is enough downward pressure on the lid (be that from the effects of globalisation, a large pool of available workers or declining commodity prices) nothing much happens, and the music plays on. But when there is no pressure on the lid the coiled spring releases, the jester bursts out and everyone is startled.
With our current inflation problem, many remain hopeful that it will fade away as quickly as it arrived. But the jester bounces up and down and the spring may require concerted force to control and compress it back to where it belongs.
We also don't know how much downward pressure it will take to get control of this inflation. Central bankers will want to avoid overdoing it and pushing the economy too far into recession. Many of them admit that there is significantly more uncertainty about the path ahead than there ordinarily is. And if we are measuring inflation differently, then it could take more time and effort than we realise to get this devil back into its box.
• Mark Brighouse is chief investment strategist at Fisher Funds
