Mervyn King is telling us not to worry about inflation. The argument is that the economy is so shot that there's loads of spare capacity and that output can be increased without any increase in marginal costs.
Capitalists@Work agree with Mervyn. It would be a foolish investor who bets against these economic forecasting heavyweights. On the other hand, I seem to remember that that another economic forecasting heavyweight, by the name of Dr Alan Greenspan, was forecasting, a few years before the financial crisis, that we'd entered a new paradigm in which we could experience a permanently plateau of high, non-inflationary growth.
Wat Tyler has a bit of an idée fixe about this. He blogged about it again today, here. He is very convincing to me, but unfortunately not to the market. The gilt market barely reacted to the inflation figures. However, more and more people seem to be saying that a purging does of inflation is the least bad option facing the government. Personally I think there is a better than even chance that the coming five years will resemble the 70's more than the 90's.
