Is this the rebirth of inflation? With commodity prices on the up and inflation building in almost every country in the world, you may well think that the era of low inflation is now well and truly over. I don’t believe this.
There are signs that are showing otherwise. Investors are using tools once used during low inflation economies. Experts say this is a sign inflation may not be taking root. One of the tools is gaming. Not only are professional investors using this avenue of investing but those with no experience are as well. The reason is because of new software just hitting the markets. It is possible to scan prices globally in seconds and uncover risk-free betting opportunities which provide guaranteed returns of as much as 12% per month. With one of the leading software called ArbAlarm, anyone can make a profit. This new trend is not only good for individual investors but it is a flag for those who track inflation.
In an interview, former City trader Rajeev Shah, famous author of ‘Sports-Arbitrage – How To Place Riskless Bets & Create Tax-Free Investments’ explained this new trend: ‘An arbitrage occurs when different bookmakers’ prices on the same events overlap. In these cases, it is possible to bet on all of the outcomes in that event in such a way as to be guaranteed a total return which is greater than the total outlay. The mathematics of this type of trade are precise & the resultant profits are free of all risk. The UK government recently announced through the Treasury that the profits made from sports arbitrage trading will continue to remain free of all tax. This means no income tax or capital gains tax on profits.
Besides arbitrage trading there are many factors that will decide which direction the economy takes regarding inflation. The emergence of cheap products from China, the fading of trade union power and the rise of the Internet did not ensure low inflation. Higher commodity and oil prices make it harder to keep inflation low, but they do not preclude it. In the end what inflation we suffer here will depend upon what the Bank of England does.
Experts believe the central banks will act strongly enough to suppress inflation through higher interest rates. If price pressures turn out to be stronger than expected, then the result will not be higher inflation, but rather weaker output and employment.
Believe it or not, in a few years’ time deflation could again be our concern. We all know that the forces in the pipeline are for higher inflation. But the pressures on the factors not yet in the pipeline are down.
It is interesting to see signs of people worldwide reacting against huge rises in petrol prices by reducing demand. This reaction will build up as people have time to adapt. The responsiveness of demand to price changes is always smaller than you expect in the short run – and larger in the long run.
Exactly the same thing happened in the 1970s. The result was a sharp drop in real oil prices. If speculation has played a major part in the run-up in oil and commodity prices then there is a good chance that these prices will fall back sharply, thereby making for ultra-low inflation, and even perhaps deflation.
But all of this is far from certain. The chances of the MPC making a major mistake are greater now than at any time in its history. The trouble is that it is not obvious in which direction the danger is greatest.
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