Globalisation, inflation & political choices

Expanding on a tweet, specifically this one:

(Because sometimes 140 characters isn’t enough – who knew?)

I think if I had to sum up my outlook for the Anglo-American bit of the North Atlantic economy, that’d be it.

It really all comes back to something I blogged about in a previous life at the BBC:

Was the “great moderation” in inflation of the 1990s & early 2000s a story primarily driven by “better policy” or “globalisation”?

Economists – who had more influence over central banks in the 1990s & 2000s than at any time previously – tend to go with the “better policy” answer. Fair enough. I won’t begrudge anyone talking their own book. We all do that.

But I’m not sure that’s entirely right.

As, the very smart Karthik Sankaran once put it…

All of this takes us back to an old topic – global vs local output gaps, and what matters in driving inflation.

I suspect the answer is both matter… but constraining the impact of the global output gap on your domestic economy has an impact. How big an impact? I don’t pretend to know.What I am fairly sure about is this: if political choices constrain your ability to import deflation… then inflation in the next 20 years will be higher than in the last 20.