Is Inflation in Our Blood?

On the Genetic Makeup of the Progressive Party

Inflation has been a source of complaint for as long as I can remember, so it was interesting to hear the Finance Minister’s hypothesis that it is in the DNA of Icelanders to accept inflation. If that’s the case, then inflation is likely more Icelandic than anything else—innate.

The truth, of course, is that with the introduction of the Ólafur Laws in 1979, indexation was implemented in Iceland. Ólafur Jóhannesson, then Prime Minister and leader of the Progressive Party, introduced legislation that allowed for indexation. The Progressive Party enshrined in law the rule that capital owners must be protected with both belt and braces.

But back to the DNA. Do we accept high inflation? I can’t see that, judging by the demands that have been made in recent collective agreements. Judging by the challenges to the government to address economic issues. Wage earners have shown great responsibility and stability by approving new long-term agreements. It is not in the DNA of the public to accept inflation; rather, mismanagement is part of the genetic makeup of the government led by the Independence Party, the Progressive Party, and the Left-Green Movement. The Finance Minister need only look at his own popularity and trust ratings to realize that it is not in the DNA of the people to accept his economic management.

But inflation doesn’t disappear with some magical solution. There are, however, a few actions we can take. The most obvious are currency issues and indexation.

Currency fluctuations and the uncertainty surrounding them create higher interest rates—simply because the risk associated with this small currency we have is greater. Higher interest rates demand more risk in investments to meet these higher requirements, which creates more uncertainty… it’s what’s called a vicious circle. This spiral of uncertainty and risk literally creates inflation because people are always trying to future-proof all pricing.

Indexation is another vicious circle. When everything is indexed, it means that if something increases, everything else follows. And because everything increased, inflation is recorded, and because inflation is recorded, indexation causes everything to increase again… and so on.

If we want to get rid of inflation, we must address currency issues and eliminate indexation. It will take time for the economy to reset, but it will pay off in the long run. It is no longer acceptable to wait; we must get rid of indexation.

This is a tone of surrender from the Finance Minister. Surrender to the decades-long policy of his own party. It is therefore time to change course and bring new parties into government—parties that dare to make changes. The Pirates dare.