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Tobin’s pie

There is probably no better definition of inflation than that suggested by James Tobin, an influential US economist, who said it was a symptom of social and economic conflict where “the major groups are claiming pieces of the pie that together exceed the whole pie. Inflation is the way their claims, so far as they are expressed in nominal terms, are temporarily reconciled”.

Beat that from the economist who gave us Tobin’s ‘q’, a notion dear to investors’ hearts that emphasises the importance of the price-to-book ratio in determining whether companies expand by acquisition or by capital spending.

Anyway, this definition of inflation – let’s call it Tobin’s pie – prompts the thought, what rate of inflation will reconcile the conflict this time? As, indeed, conflict it is – we only have to watch the actions of P&O Ferries or hear the threats of the RMT, the railway workers’ union, to know that. Obviously, investors need a view because at some point, if it isn’t already happening, inflation is likely to erode company profits either by depressing demand, raising costs or both.

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