Inflation, jobs and intergenerational economics

Do central banks care about unemployment more than inflation? To some extent it is an intergenerational issue.

The question arises after the winner in the Japanese general election on Sunday, the Liberal Democratic party's Shinzo Abe, demanded the Bank of Japan accept higher inflation as a fair trade off for policies that could kickstart the moribund economy. The demand follows a speech by US central bank chief Ben Bernanke, who has taken the hint thatunemployment remains too high and said, in central banker code, that cutting unemployment will be his chief target. If he starts to see prices rises get out of control, then he will pay attention to the old inflation target, but making sure the US avoids millions of long term unemployed is priority number one.

In the UK, the Bank of England can already point to three years of measures unemployment targeting at the expense of inflation. Its policy of printing money under its quantitative easing plan has infuriated inflation hawks and savers groups, who want to maintain the pre-crisis focus on fighting high inflation.

And here we have the intergenerational issue in a nutshell. Older people with pots of cash in savings and investment accounts want low inflation to protect their assets. Young people, who have only small savings, if any at all, and big debts, are keener on having a job to pay the bills.

Constant influxes of migrants and young people into the US labour market keeps the population young and agitating much more for a job than low inflation. Bernanke is susceptible to the younger and poorer element, many of whom voted for president Obama, when he reviews his policies.

Old Europe, grey of head and weak of limb, prefers to pay the bills from gains on its savings wealth. Voters in Italy, Belgium and Germany demand the European Central Bank remain unreconstructed. Inflation remains the focus of the ECB board.

The UK straddles both camps and as such, charts a middle course somewhere between the ECB and the US Federal Reserve, though the Old Lady of Threadneedle Street is expected to start tacking towards the US soon.

Governor Sir Mervyn King's successor, the Canadian Mark Carney, joined in the debate last week when he said inflation targeting could be abandoned completely in favour of tracking nominal GDP, which is another way of saying the central bank should seek to maintain growth (and jobs as a key byproduct).

The Japanese situation is different because after two decades of virtually zero inflation and zero growth, even the ageing savers of Tokyo understand they need a bit of inflation in the system (if only to make people spend a bit more now rather than tomorrow when their spending power is diminished by rising prices).

Economics, then, is a battle of the generations as much as it is a battle between rich and poor. There are plenty of young people who will be gifted or inherit wealth from their well-off parents, giving them an opportunity to own property denied many of their compatriots. But there are few families these days who can create or pass on a job. The economy needs to create jobs and it can only do that if the economy is moving.

The only downside for workers in letting inflation rise jump to more than double its current 2% "optimum level", as envisaged by dovish central bankers, is that employers feel little pressure to maintain wage rates. Past generations have inflated away their debts knowing they had the power as workers to maintain their wages in real terms. But in an era of declining trade union strength that is harder for the average worker. When employers fail to maintain the spending power of wages, only property owners gain. Maybe that's the point of the exercise.