The modern economy has been characterized by very low inflation and booms and busts in asset prices.
In the U.S., inflation has been on a big downward trend for years, even amid booms, bubbles, and solid economic rebounds. The story is similar in the U.K. And that’s what we just saw this morning.
On Tuesday morning, two numbers came out from the U.K.’s Office of National Statistics.
One was the May CPI reading, which showed that inflation just fell to its lowest level since 2009.
Here’s the chart:
Now you have to realize something, which is that by most accounts the U.K. economy is booming.
Pretty much every economic measure from the U.K. has been hot, and last Friday, the head of the Bank of England Mark Carney hinted that rate hikes could come sooner than markets were expecting. This led to analysts pulling forward their forecasts for when rate hikes would come, with many now predicting that Bank of England rate hikes could come this year.
And yet here’s inflation, which is usually the big warning signal of an overheating economy, sitting near decade lows.
Meanwhile, another data point just came out that tells a different story.
The U.K. housing market is booming, the Office of National Statistics tells us.
Home price gains have accelerated to their fastest pace since the crisis.
And the London market is just insane. Here’s a breakdown by region.
So this is your snapshot of the economy. On the one hand, you have basically no inflation by historical standards. But in terms of asset markets, particularly real estate in prime locations, prices are going up like crazy. The situation is not good, and it drives Central Bankers mad because they don’t like to see numbers like that one in London, but they don’t want to choke off a recovery when inflation isn’t at the levels they want.
And again, this isn’t just London. The same scenario has presented itself for years in the U.S. There hasn’t been worrisome inflation in a long time, but there have certainly been destabilizing asset booms.
As for why this is, people have all kinds of theories. Some think it’s a function of central bank policies that are impotent and boosting the real economy but are effective at blowing financial bubbles by providing cheap capital. Others talk about a “new normal” or “structural stagnation” where for structural reasons, economies are unable to grow and induce normal inflation. The view of Larry Summers is that something has changed in the economy (perhaps relating to population changes and technology) that necessitates bubbles in order to get widespread growth. Nobody has nailed it down exactly.
Regardless of why this is going on, what we just got from the U.K. is a snapshot of a story we’ve been seeing for a long time.