Social unrest and inflation

Mar 1, 2013·The GoldMoney News Desk

Sterling is once again front and centre of market attention today – and again, not in a good way: tumbling by nearly 1% against the dollar following news of an unexpected contraction in UK manufacturing last month.

The pound is now at its lowest level against the dollar since May 2010, and from a technical perspective things aren’t looking good for sterling. As mentioned in our last News article, this is sure to result in more inflation being “imported” into the British economy – courtesy of rising import costs – making even more of a mockery of the Bank of England’s claims of a few years ago that any inflation rise would be “temporary”.

Sooner or later the BoE is going to be faced with a very difficult decision – and likely a forerunner to the same decision other central banks will have to make in relation to their own currencies: raise interest rates in order to try and put a lid on inflation or risk even higher price rises. The problem – as seen in the UK during the 1970s and 1980s – is that once the inflation “genie” is out of the bottle, it’s very hard to rebottle it. So just as gold priced in yen has been surging of late, it seems a reasonable prediction that gold is going to have a good few months in terms of its sterling value.

Over at Economic Policy Journal, Ciaran Ryan draws attention to great research done by Johannesburg-based economic research group ETM Analytics, looking at countries experiencing severe social unrest and how this relates to inflation in these countries. As the chart in his article shows, there appears to be a strong correlation between high inflation and riots – a phenomenon well documented by economist Friedrich Hayek. Perhaps deliberately trashing your currency in an attempt to help your economy isn’t such a good idea after all.

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