Why the world will experience large inflation?

Many developed economies are facing huge debt burden ralated to financial crisis and to aging population. The first factor is related to falling tax revenues amid slow growth and to large public spending related to saving the bankrupt banking sector. But this is peanuts compared to the second factor. The second factor is related to the fact that old generation will have pensions financed by the young generation in the form of much higher taxes or financed by massive increase state borrowing, ie. huge budget deficits. For example as estimated by the European Commission the replacement rate (ration of pension to last wage) in many countries is high and cannot be sustained in the future. Five highest in Europe are: Greece (73%), Italy (68%), France (63%), Spain (58%) and Poland (56%). Very few countries implemented pension reforms that take aging into account. For example in Poland budget financed pensions will fall to below 30% replacement rate in 2060. It yields stable public finances at the cost of falling living standards of the old generation. It remains to be see whether such low replacement rate is politically sustainable.

Price level in Great Britain over 350 years

 

Inflation2

Inflation2
Inflation2

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