It is all a question of timing. At some point, the economy will improve. Given the policies enacted across the world over the past year, at some point inflation will take off once more.

But will these points come within months, years or decades? The slow-motion way in which the summer 2006 shock to US house prices sparked a sell-off in credit markets a year later, which did not cause a crash in equities until the autumn of 2008, is a reminder that remorseless economic logic can take a while to work itself out in the real world.

This gives context to the news that the UK’s retail price index is in negative territory for the first time since 1960. The UK is following policies designed to spark serious inflation. But this will not happen immediately.

Inflation expectations derived from index-linked gilts have veered wildly. Last summer, UK consumer-price inflation was expected to average 3.75 per cent over the next five years; by November, the market was pricing deflation of 1 per cent; and now it is pricing inflation of about 1.5 per cent.

Working out when inflationary pressure will finally overwhelm the deflationary forces now at work is a critical issue both for policymakers (who will have to put on the brakes) and investors.

It depends in part on timing the revival in growth, which is also difficult.

Tuesday’s German ZEW survey of investor sentiment showed the most negative view yet of current conditions, with those taking a gloomy view outnumbering the others by 92 per cent. But optimists outnumbered others by 13 per cent when asked their predictions for six months’ time – the most positive reading in two years. This survey has not been a bad leading indicator in the past.

Again, the issue is timing. Plainly, optimism is returning. But will there really be a strong recovery within six months?

Forum: Discuss John Authers’ Short View

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