Economist warns inflation, a 'thief that steals your savings', is coming

An economist is warning a "thief that steals your savings" is about to make a comeback after 30 years in the wilderness - high inflation. 

The consumer price index (CPI) figures for the first quarter of the year are due on Wednesday. Banks are picking they're going to be in the range of 0.7 to 0.8 percent - if maintained for a year, that'd be between 2.8 and 3.2 percent, the highest annual rise since the global financial crisis and potentially outside the Reserve Bank's target of 1 to 3 percent.

"There will be a little bit of an acceleration, but not too much," economist Cameron Bagrie told The AM Show on Tuesday. "The bigger picture here - not just about inflation for the March quarter - it's about what's going in regards to inflation trends over the next two to three years."

In the 1970s and '80s, inflation was often above 15 percent. After plummeting in the early 1990s, it's rarely hit 5 percent.

"Inflation, if it turns up, it's a thief that steals your savings," said Bagrie. 

"As technology's come more and more into our lives, it's been pretty tough to put up the price of goods. There's been more pricing transparency and that's been deflationary. We've also had globalisation - a fancy name for outsourcing stuff," he explained.

"But if you look going forward, there's some pretty big secular shifts that are starting to emerge. Globalisation, outsourcing, that theme's starting to unwind. We're starting to have a little more of a home bias. Climate change is going to carry some costs.

"The population is ageing - that means we're seeing more demand for workers down the track, I think that's going to put pressure on wages and that's going to feed into inflation. Government policy is becoming very redistributive, as opposed to focused on growing the pie. Massive amounts of liquidity around the globe courtesy of central banks flooding the system with all that printed money.

"It may take five to 10 years, but people are starting to talk a lot more about what the inflation story could be down the track. After a decade of no inflation, or 1 to 1.5 percent inflation... the inflation story is a lot more of a risk than what we've experienced in the last 10 years." 

Bagrie said COVID-19 supply chain challenges are leading to price rises, and those who haven't upped theirs yet probably will soon.

"I haven't seen these sort of cost pressures or intentions of firms to put up prices in about 30 years."

As prices rise, so do wage demands - and when people's wages go up, so does demand, which raises prices - a "rat race", in Bagrie's words. 

While rampant inflation decreases the value of people's savings, a little bit of inflation is generally seen as good for the economy - it erodes debts and stimulates spending. Negative inflation - or deflation - can dampen spending, as people wait for prices to drop further before shelling out, which harms the economy. 

"The Reserve Bank wants to get a little bit more inflation to meet their mandate," said Bagrie. 

The CPI briefly fell last year for the first time since 2015 in response to plummeting demand for oil, travel and tourism, as the world went into lockdown. 

Bagrie said it's not good to have inflation too high for too long.

"We saw that in the 1970s and the 1980s,  and it didn't end that pleasantly."