The only thing central banks hate more than inflation, says Tony Stenning, chief executive of investment management firm Atlantic House, is deflation.
For the period of more than a decade after the financial crisis and prior to the pandemic, deflation was the threat which stalked the global economy, despite conditions which would have been expected to produce inflation.
Record low interest rates and quantitative easing policies pursued at the same time as economic growth returned in the immediate aftermath of the crisis.
UK and global inflation is now running at considerably above central bank target rate of 2 per cent, but both the UK and US central banks view this spike in inflation as "transitory” and the result of the re-opening of economies after the pandemic, with inflation reverting back to a level closer to 2 per cent over the coming year.
The three possible outcomes over the period are, firstly, that central banks are wrong so that policies being pursued now will lead to markedly higher inflation for years to come, a view expressed recently by outgoing Bank of England chief economist Andy Haldane.
The second possibility is central banks are correct and inflation reverts to around the 2 per cent long-term target range, though even this would be markedly higher than the rate for much of the past decade, impacting client portfolios.
The third potential outcome is that once the initial bounce ends, economies revert to their pre-pandemic state, where deflation is more of a threat than inflation.
Stenning believes the reason inflation was so low, and at times negative for a decade after the financial crisis, may be found in the equation which has underlined how almost all policy makers have run economies in recent decades, and that may also explain why inflation, rather than deflation, is the story of the next decade.
The equation in question is MV = PT, known as the quantity theory of money, an idea which was popularised by the US economists Irving Fisher and Milton Friedman.
In the equation, M is the quantity of money in the economy, V is the velocity at which money travels through the economy, P is the level of prices in the economy, and T is the number of transactions in the economy.
Monetarists believe the quantity of money in the economy dictates the other points, so if the quantity of money increases, so will its velocity, the number of transactions, and prices, with the latter two leading, successively, to higher growth, then higher inflation.
The policy of quantitative easing, that is creating money and injecting it into the system, was designed to increase the supply of money, while low interest rates should have helped with the velocity of money.
But Stenning says the weaknesses of the global economy during that decade, when growth never rose above anaemic levels, and inflation generally remained very low, and for some periods, actually negative, where the direct result of the MV=PT equation were not working.