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Time to worry about inflation?

Stephanie Flanders | 13:31 UK time, Friday, 28 May 2010

Inflation is well above target - and well above where the Bank of England and others expected it to be not very long ago. That much we know. The big question is: should we worry?

Two different events this week seemed to suggest we should. The Organisation for Economic Co-operation and Development said in its latest economic outlook that the UK authorities, almost alone among the OECD, needed to be wary of losing their credibility on inflation. It even gave the Bank of England some free advice - to raise the bank rate to 3.5% by the end of 2011, starting "no later than" the last three months of this year.

The remarks were interesting because (a) the OECD doesn't usually give such specific advice to anyone, let alone to central banks; and (b) the text of OECD reports is always circulated well in advance to the countries concerned. This means someone at the Treasury was happy to see all this appear in print.

The other event was the release of the third estimate for UK economic growth in the first quarter of 2010. As expected, this was revised up slightly, to 0.3%. But the stand-out statistic on GDP wasn't the real figure - it was the nominal. These figures showed nominal GDP - the cash value of all transactions across the economy - growing by 2.1% during the quarter, or an annual rate of more than 8%.

The implication is that the GDP deflator - a measure of economy-wide inflation - rose by more than 1.7% in that period. That is partly due to the rise in VAT in January - but not entirely. Excluding taxes, prices across the economy rose 1.2% on the quarter, up from 1% in the fourth quarter of 2009 and 0.8% in the quarter before that.

The simplest explanation of these figures is also the most favourable to the Bank of England: quantitative easing worked. Just as the Monetary Policy Committee intended, pumping all that liquidity into the economy seems to have helped maintain nominal spending across the economy in the second half of 2009, even while the economy and the supply of bank credit were continuing to shrink.

But, as I have said in the past, there is still the lurking worry that coming out of this recession the UK could find itself getting less growth bang for every buck of nominal demand. To put it another way: the fear is that the balance between growth and inflation will turn out to be less favourable than before, and the Bank of England will need to put the brakes on the recovery sooner than it or anyone else had hoped.

For MPC members of a nervous disposition, it is not reassuring that the Bank - and so many independent city forecasters - have been getting their inflation forecasts wrong.

After all, they knew about the VAT change. They also, clearly, knew about the fall in sterling. These were incorporated in their forecasts, as was - at least partly - the rise in the price of energy. Yet still they were wrong.

Inflation is high

More troubling, perhaps, inflation expectations are starting to drift up. Not massively. But worriers could definitely spot a trend.

The City, in general, still seems fairly relaxed. For all the muttering about the "Bank losing its grip", you're not seeing a big rise in City inflation forecasts, whether in the economists' formal predictions or embedded in the price of indexed gilts.

The relaxed school has plenty of big arguments on its side. For example: if you strip out the effect of tax changes, the annual rise in the consumer price index to April was much lower: 1.9%. If you also strip out energy prices, it was 1.4%.

Even if inflation expectations are ticking up, there's also little sign that workers are extracting higher pay rises. As Graham Turner, of GFC Economics, points out, IDS data for the three months to March show nearly a third (31%) of pay settlements involved a wage freeze.

More generally, it is clear that fiscal policy in the UK over the next few years is going to be sharply contractionary - rather more than the previous government had planned. The government is going to be contributing much less to overall demand, and keeping a tight grip on public-sector pay.

It is difficult to see how this feeds into a lot of domestically-generated inflation. But the big lesson of the past few years is that domestically-generated inflation is not necessarily the big concern.

Remember it was global food and energy price rises that pushed inflation up to 5.2% in September 2008, leaving some members of the MPC still talking about needing to raise UK interest rates, just weeks before Lehman Brothers went bust.

Today's high inflation doesn't necessarily tell us much about what inflation will be tomorrow. But it does bring home two deep - and somewhat uncomfortable - truths about the global economy and Britain's place in it.

One is that "re-balancing" - learning to sell more to the rest of the world - is no free lunch.

There is much rejoicing that we are not in the euro: and rightly so. It means we can use a cheaper currency to price ourselves back into the global market. But to boost our international selling power - and the competitiveness of UK workers - our purchasing power has to take a hit. Prices go up, but wages must not. Or not as fast.

Coming out of this process, our companies should be more internationally competitive. But we shouldn't delude ourselves: the pound in our pocket will be worth less. We will not be able to buy as much with it as we did before. Indeed, not buying as much as before is rather the point.

The other big truth about the world today is that in many global commodity markets we are not price-makers anymore - we are price-takers.

In the old days, demand from advanced countries like the UK used to set the price of steel, oil, food and the rest. Now - not so much. Now, demand from the emerging economies can play an equally large role - especially since their growth is more commodity-intensive; look at China.

HSBC's Chief Global Economist Stephen King spells out in more detail what this shift in global economic power could mean to all of us, in his scary but excellent new book, Losing Control.

In the meantime, we can comfort ourselves that domestic inflation is still - more or less - under the Bank of England's control. Even in a globalised world, the bank can still, in the end, control the amount of money flowing through the economy, which means it can stop inflation taking off as well.

But the Bank of England can't make the path out of this crisis an easy one. And it can't reimburse us for all that we have lost. Quite the opposite: it has to make sure that all of us - collectively - take a hit.

Comments

Page 1 of 8

  • Comment number 1.

    Another excellent article Stephanie. I am still puzzled as to why QE isn't infaltionary. Maybe I believed the monetarists in the 80's too uch but surely if there are more pounds in the world each one is worth less?

  • Comment number 2.

    Our Steph: "The big question is: should we worry?"

    Yes and I have done for many years now.

  • Comment number 3.

    Flanders the economic "expert":

    "make sure that all of us - collectively - take a hit"

    So,the British people have not already been taking "a hit" for the past several decades then?

    If you accept that there are 62 Million people in the UK (refer to Government web site ONS) only 36.6 Million are of a working age.
    7.7 million of these are economically inactive
    7.2 Million work part time
    6.65 million work in the public sector
    That leaves 16.7 million in full time employment in the private sector.
    Then subtract the low-wage,low tax(even subsidised)"Macjobs" from that 16.7 million.


    Just admit it Stephanie,Air-strip one`s economy is a rotting corpse.
    Your precious British establishment will reap what they have sown.

  • Comment number 4.

    ' In the meantime, we can comfort ourselves that domestic inflation is still - more or less - under the Bank of England's control. Even in a globalised world, the bank can still, in the end, control the amount of money flowing through the economy, which means it can stop inflation taking off as well. '

    The Bank of England has no control over oil or gas prices or orther commodities.
    The Bank of England has no control over the cost of food imported from overseas
    The Bank of England has no control over whether food costs rise because ash plumes affect delivery
    The Bank of England has no control over exchange rates which affect all imports whose prices are not set by the Bank of England
    The Bank of England has no control over increases in fuel, alcohol or tobacco duties or equivalent
    The price of our imports is not going to change because of the Bank of England, only if worldwide demand outstrips worldwide supply
    The Bank of England could not affect inflation of house prices, the measures did not include this

    To think that the Bank of England has any control over inflation with the level of fiddling they can do and keep the cost of government borrowing as low as possible is crazed.


  • Comment number 5.

    Yes, we should be worried. Inflation - often high inflation - has been the UK's #1 drug for every year except two since 1939.

  • Comment number 6.

    An interesting blog Stephanie although quite a lot for my old brain to take in. Being a pensioner with modest savings generating little interest I am indeed concerned that inflation rears it's ugly head and reduces the purchasing power of my savings and of my currently frozen works pension. Having for many years seen Chancellors and so called experts get their forecasts wrong far more often than right I can understand why the OECD feels that we might need their guidance although why should I trust their judgement. Forgive me for feeling that too many cooks are spoiling the broth. Let us hope that our new Government can steer us through the coming years by not punishing the thrifty to bale out the spendthrifts.

  • Comment number 7.

    Interest rate needs to rise to a sensible level, in order to contain the growing inflation expectations. The current CPI annual Inflation rate is 3.7%. Now this is well above the BoE target rate of 2%. This is due to higher import prices of essential commodities which is in turn due to a weaker GBP.

  • Comment number 8.

    I should explain comment 2 more.

    We are going to lurch from one set of inflation/interest stastistical highs and lows to another for the forseeable future (5-10years minimum) while our new 'War Cabinet' wrestle with our foe..........errrrrr our former deluded society, and the catastrophe we/they left ourselves.

    I really wish the government would officially publish and ram down everyone's throats the full set of horror numbers they've inherited, and reissue the 'correct' RPI inflation numbers that *should* have been used to steer economic thinking.

    The population needs the truth and the biggest hardest smack around the face to bring them to wake up and smell the coffee on that big number with a negative on the front of it that some blokes with nice educations but no jobs skills have 'whizzed' up the wall for the past 13 years.

    Watching Question Time last night just proves people still think it's just a recent phenomenum and the 'Banks fault' ! Jeez! Some one even suggested keeping identity cards going (even though they're not that good) because we has invested (wasted) too much on it already, so better keep going, at least a few people keep their jobs! Throwing good (borrowed) money after bad (borrowed) money ring any bells???

    Our new leaders need to dish the medicine and quickly becasue the longer we take to cure the more it will hurt over all.

    As our Steph in a master of understatement has said:

    "re-balancing" - learning to sell more to the rest of the world - is no free lunch"

  • Comment number 9.

    Stehanie - your blog
    'There is much rejoicing that we are not in the euro: and rightly so. It means we can use a cheaper currency to price ourselves back into the global market. But to boost our international selling power - and the competitiveness of UK workers - our purchasing power has to take a hit. Prices go up, but wages must not. Or not as fast.'
    --------------------------------------------------
    Wages for a lot of people, for a length of time that may surprise a lot of commentators, have not been going up. And there lurks another problem: these people are already having to be supported in part by the State. Worse: they and more others will need increasing levels of State support. Especially if, as normally happens with increasing inflation, increasing numbers lose their jobs.

    As, in effect, I posted on NR's blog at 2.15/2.16pm today, if the higher earners do not take on the burden of more tax and more of the pain for the credit crunch now, they will be left paying the burden of a stagnant or recessionary economy with unemployment climbing upwards.

    Taxes and other costs have reduced the international competitiveness of the mass of the workers in the lower half or two thirds of the UK economy. This has to be addressed. It's TINA time.

    Hey! Let's be REALLY VERY CAREFUL, out there, today!

  • Comment number 10.

    The Bank of England is forecasting that inflation will fall next year, yet, even though 90% of economists believe that VAT will rise over the next year, this tax increase isn't in their forecast. A VAT increase will surely mean that inflation will be above target through 2011. Their forecast is meaningless -- and they know it.

    The Bank of England is intentionally trying to mislead the public to not worry about inflation, drawing attention away from the fact that they are gutting the earnings of average worker in order to bail out the banks and property speculators through the free money of a 0.5% base rate.

  • Comment number 11.

    Wahey!

    It`s a slow moderation day.

    Again.

  • Comment number 12.

    Thanks for your latest update on inflation in the UK and its implications Stephanie. Having followed your blog I have seen you move your position from being that inflation was definitely not going to be a problem for the UK to now being "fairly relaxed" about the fact it is above target.Not everybody has shared that view and I notice that the notayesmanseconomics web blog has a different analysis and viewpoint.
    "If you take what was our inflation target RPI-X I would like to point out that it is now 5.4% and also that its targeted level was 2.5%. So it is 2.9% over its target. This is really quite shocking on two counts. Firstly as I wrote in my technical point of the 20th April there was a clear relaxation of inflation targeting when we switched from this to CPI as a target. But secondly we are seeing how much our guardians are willing to let this measure run over target."

    For those interested in such matters[Unsuitable/Broken URL removed by Moderator]

  • Comment number 13.

    Too late to worry about it now !

    'Printing money and thereby de-valuing the currency must be followed by inflation as soon as demanded picks up. This is only reflecting the 'new' and lower purchasing, or value power of sterling.

    The plight of the American dollar is even worse!

    Mike, Barcelona, Spain

  • Comment number 14.

    Even at the present level of inflation, savings can't keep their value without entering into risky investments. Prudent savers are being hung out to dry. What is our shiny new government going to do about that??

  • Comment number 15.

    Inflation seems to peak at double the unemployment rate on the graph,
    so what is to come could be off the screen...

    For those people worried about paper and who want to buy gold

    http://money.cnn.com/2010/05/27/news/companies/gold_atm/

    now what if gold was to replace all credit cards...

  • Comment number 16.

    Workers prepared to take a pay freeze? This is on the cusp of change, witness the upcoming BT dispute where 2% was rejected. That, according to your informative graph, is right on the money as regards inflation expectations. If the Government doesn't spell things out in detail soon expect more of the same from public sector workers as well as the private sector. Regards, etc.

  • Comment number 17.

    "it has to make sure that all of us - collectively - take a hit."

    This is the biggest bugbear for those of us who have saved sensibly, not overleveraged on debt to fuel the champagne lifestyle, hav refused to buy stupidly unaffordable overprice housing stock and actually taken a longer term prudent apprach to life.

    Not letting the feckless, greedy and irresponsible fall is just a pi$$take in my humble opinion.

    We have our very own brand of public moral hazard. Why save when the government will bail you out if you cant pay your bills. Why plan for the future when the profligate will cause countrywide problems rendering your hard earned savings worthless?

  • Comment number 18.

    Stephanie;

    you wrote -

    "if you strip out the effect of tax changes, the annual rise in the consumer price index to April was much lower: 1.9%. If you also strip out energy prices, it was 1.4%."

    And if you strip out all prices, it was 0%. This is a pointless exercise and is what we in the trade used to call "clutching at straws".

    I expect interest rates to rise but the Bank of England base rate has become meaningless, at least for the time being. No-one in the real world can borrow at anything close to 0.5%. Even savers are getting 2.5% or so, and borrowing interest rates in the real economy start at 6% and up. Raising the BoE rate to 3.5% will have little real impact.

  • Comment number 19.

    Thanks for a nicely balanced article Steph.

    There is only one way we are going to get out of this and that is by the old stand by - inflation.

  • Comment number 20.

    There is a piece worth reading here today, relevant to this discussion and following on from a link I posted on Stephanie's last blog

    http://www.businessinsider.com/theres-nothing-wrong-with-talking-your-book-but-david-einhorns-dire-debt-warnings-are-just-plain-dangerous-2010-5

    Also a good article by Martin Wolf in the FT today;

    http://www.ft.com/cms/s/0/932eafe6-69c1-11df-8432-00144feab49a.html

  • Comment number 21.

    What are you on Flanders? .. If the banks released ANY of that QE into the system then inflation is a by-product. This is economics 101.

    Despite the stay of execution granted by the Euro, the chinese are reducing their dollar reserves as it is sliding into oblivion and Obama is following the Zimbabwe economic model.

    So your point is we will struggle through but its not going to be easy? I know we are an island but we are not isolated from the imminent collapse of the dollar.

    Just as point of interest, did you know that the car buy back scheme in the US was the idea of the Chinese not the US Government/Businesses? The Chinese are buying US metal over their dollars.
    How scary is that?!

    Keep playing the obfuscating game ..

  • Comment number 22.

    #3 I think your stats are a little out. latest numbers are that

    Employment is 28.83m or 72% of working population (which implies a working population of 40m)

    But bear in mind that some of the working population will be at university and some will be full time mothers this does not mean that 12m people are available for work but unable to get it.

    It would be virtually unheard of for UK employment to be more than 80% of the working population.

  • Comment number 23.

    At present i think the main anti inflationary pressure is the underlying fact that most ordinary people are getting poorer---wages have been frozen and even fallen for well over a year in lots of companies.

    This speaks to what I think is a very big problem for the authorities in that the basic price of assets is dependent on confidence---many statements, initiatives and 'plans' basically seem to have little more real substance than an attempt to 'bolster confidence'.

    But pushing back against the attempts to manufacture confidence is the debilitating effect of real world concrete factors like the wage drops in cash terms coupled with equally real wage drops in inflation-indexed terms.

    People are holding their breath to see what this budget and then the following one actually show--then it may be that inflation isn't the problem but deflation---and I do think this is one reason as to why the authorities are seemingly relaxed about inflation----they believe the real world pressure to deflation will counter act the theoretical reasons propelling inflation.

  • Comment number 24.

    Chris Clark: "..but surely if there are more pounds in the world each one is worth less? .."

    Chris you have eyes but you are straining to see. Its all out there for you on the internet if you are looking.

    Economists like Flanders have a job to do, and that is to be ECONOMIC with the truth. Manipulated perception is what gives this monetary system value, not reality.

    Only take what you know to be the facts all the rest is opinion. An opinion borne from afternoon G&T's and B.Mary's in watering holes around the Bank.

  • Comment number 25.

    The means of which to control Inflation.

    Sounds good don't it, as a Sound-Bite as used by every Government since heavens knows when.

    The problem with this type of "Control", is that it advances the opinion that Interest Rates are being shielded from attacks away from Free Market pressure.

    It a bit like covering your Child to insulate it from the Sun, but knowing that one day this Child will grow-up and lay upon the Beach.

    Which proves a Point, that the Government at some Point WILL have to let Interest Rates find its own leveled positions without any further needs to be smothered by albeit, Politics.

  • Comment number 26.

    The rate at which cash is being created on each side of the Atlantic may be unprecedented. It isn't inflationary because it isn't enough, probably nowhere near enough.

    The increase in the money supply does not rely upon the creation of fiat money. Money is created when banks advance loans and when companies use lines of credit that have been facilitated.

    Instead of creating a larger money supply the recently created fiat money is probably on fairly inactive balances because the total amount of QE going on won't make a serious dent in total debt levels.

    Basically the banking sector does not want to add more trillions of debt/money to the very many trillions it has already created. This deleveraging will lower demand almost whatever is done.

    One of things that BoE has recently switched to is buying corporate bonds as part of QE, essentially by-passing banks for the issuers of these bonds. This is probably of only indirect help to SMEs though.

  • Comment number 27.

    On the subject of BT. In fact some employees of BT have taken a pay-cut (in money terms) and many are working more flexible hours because. The company has also shed very many staff. As a result there is a £1 billion profit. Many workers feel they should share in that by inroads being made in the pay cuts they agreed to take when the company was apparently on its knees.

    The situation at BT is one where the senior managers took their eye off the ball and didn't attend to fairly basic housekeeping. Of course, now that they have started to do what they should have been doing all the time they "earn" bonuses.

  • Comment number 28.

    Intricate details here, Stephanie, thanks. But, Mervyn and colleagues are hanging their inflation hat on the output gap THEORY. Potential GDP is greater than actual eg unemployment high and industry operating below capacity - THEORY provides buffer against inflation. Where's the evidence?

  • Comment number 29.

    Inflation rises = expectation rises

    the more persistant the high level, the greater the wage demand and the more likely we will have industrial disputes. The argument that you will not have a job if you do not accept a pay cut does not hold much sway when the pay cut starts hitting 7-10% p.a.

    As usual it will be the poorest people in society who will get the worst deal. The potential for 80's style unrest seems a possibility.


    Ach well I enjoyed the last 15 years of economic growth and prosperity, I guess with Thatchers children back in power we can expect another 15 yrs or so of Torment and poverty.

  • Comment number 30.

    Hey, let's stop with the "thank goodness, we are not in the Euro, so we can devalue" tosh. Thank goodness we are not in the Euro, yes - for political reasons, not economic ones. Can't commentators understand that devaluation is a reflection of something that has happened in the past and not a tool for economic management in the future. Devaluation happens because our balance of payments is negative, because we have printed money without any increase in productivity and because our domestic inflation rate is higher than most other countries.

    Devaluation is bad news - it puts up prices on everything we import and means we have to export more units to make the same value as before. It makes us poorer. Borrowing (public and private) only makes matters worse as the money created spins around in the economy and ends up feeding our import buying habit.

    Ask the Germans what they think of devaluation. Don't bother, I'll tell you - "Devaluation? It's for losers".

  • Comment number 31.

    Inflationary risk is always implicit in QE. The point to bear in mind is that the effective money supply (as it determines inflation) is a multiple of quantity and velocity. Once the banking crisis hit, velocity dropped sharply as people and businesses reduced spending and hoarded cash, so increasing quantity (i.e. QE) was appropriate.

    But (and it's a very big 'but'), if/when velocity returns to more normal levels, then QE must be reversed - if it isn't, then inflation will result. I've believed all along that we've been far too relaxed about inflation.

    One irony at the moment is that, of the three major traded currencies - USD, EUR and GBP - all have major weaknesses. EUR problems we know all about; the UK economy is weak, and public borrowing is excessive; and the sheer scale of US off-balance-sheet obligations suggests that the USD isn't all that "safe" a haven either.

    So, if reasons for trusting USD, EUR and GBP are scant, does this mean that confidence in money itself is eroding? It looks that way. And if so, this would suggest a big spike in inflation (which, frankly, is the only way we're going to devalue the debt mountain anyway).

  • Comment number 32.

    Another user-friendly and insightful article Stephanie!

    # 3 BiiBoidshateu, there's no need to have a go at the writer. She is giving an insight into the workings of the machinery of the UK economy, but she isn't personally responsible for the intrinsic make-up of the resources (in this case the UK labour market....)!

  • Comment number 33.

    Should we worry about inflation ?
    Like so many things in life the answer is "it depends"
    In the main it depends on whether you are a saver or a borrower, if a saver then Yes you should we very, very worried. If however you are a borrower then no.
    The great unmentioned reality is that the only real way that the UK is going to get rid of its £1.4 Trillion accumulated debt, thanks Gordon,is to allow a high level of inflation, thus destroying the debt. That way it is our creditors who lose. It also of course screws everyone who did what they thought was the right thing and saved for their later life, but who cares about them.
    The real rate of UK inflation is already way above what is being reported.
    I am probably one of the few people at the moment to be building a commercial property.
    How about these two as examples of current inflationery trends:

    reinforcing steel has increased in price, since January 2010, by 45%, thats 45% not 4.5%
    On Tuesday next, 1st June, premixed concrete is increasing in price by 7.4%
    It may still be fashionable to kick the Thatcher doctrine, but the reality is that inflation follows, as night follows day, the rate by which the money supply is increased. QE has increased the money supply by 300% so there is plenty of scope for double digit inflation.

  • Comment number 34.

    Although I appreciate the dangers of inflation in the UK economy (particularly with respect to distribution of wealth and loss of UK competitiveness)I am also mindful of David Blanchflower's recent arguments, which also are quite powerful. He asserts that the time for inflationary targetting is now over since we need to avoid a double dip recession and deflation at all costs.

    Significantly he has pointed out that inflationary pressure in the economy could have a positive impact on nation debt in the UK (since not all UK gilts are index linked). Moreover the housing market in the UK would benefit from some inflationary pressure even if house prices remain static in real terms. This is because the number of people in negative equity would fall and there might even be some improvement in the marginal propensity to consume as a result of wealth effects.

    Essentially the game has changed - more flexibility is needed and inflation targets are arguably less important. I think that there is some recognition of this already within the actions of Mervyn King and the Bank of England. The BOE need not feel restricted; afterall the Bank of England Act 1998 states clearly that although achievement inflation targets are important this cannot be done without consideration of growth and employment.



  • Comment number 35.

    Personally, I'm not worried for myself as I've moved most of my spare cash into tax-free inflation-linked savings accounts. My bank kept trying to persuade me to put my savings into one of their accounts, paying just 0.5% net interest compared with the 5% tax-free I've been getting for the past year elsewhere. So in that sense, bring on inflation I say!!

    On the other hand I'll admit to not being sufficiently knowledgeable to understand the wider implications of high inflation. I understand it will have an adverse affect on those with fixed incomes and likely lead to devaluation. But as someone who works in an international industry which relies on winning work from overseas that might not be a bad thing for my job prospects - my wages might go down in real terms but at least I'll still be employed.

    Anyway (and I stand to be corrected by somone more knowledgebale), wouldn't high inflation be just a symptom rather than a cause of our long-term problems? We all suspect deep-down, even if we don't like to say it aloud, that our standard of living has peaked and we are due for a decline. If inflation is a by-product then why worry about it?

    Instead of making the absolute rate of inflation our prime concern shouldn't we instead focus on the basics? Hasn't a narrow focus on inflation as the prime indicator of economic health been one of the sources of our problems - it was only 2% for a decade so everything was OK wasn't it? Wrong!! We lost sight of the bigger picture and stood back admiring our property portfolios as our wealth creating capacity went overseas.

    At least now I think we have woken up and smelt the coffee - even our new son-of-a-stockbroker PM admits we need to focus on manufacturing and technology rather than shuffling electronic promises to pay. Newsflash - some of us have been doing that for years, in the face of much sniggering... 'Oooh a bright lad like you shouldn't be designing stuff that people want to pay hard cash for, get yourself into the city and "earn" some proper money'. Well who's laughing now? (err... they are actually as they continue to rake in the bonuses but you get my point - it just amuses me how all that old-school manufacturing and engineering that UK PLC wouldn't touch with a bargepole is suddenly flavour of the month).

  • Comment number 36.

    ...and by the way. Fiscal dividend could mean that hundreds of thousands of taxpayers fall into higher tax bands as the reult of inflation. Although the BOE acts "completely independently" of government it is easy to see that fiscal dividend would be attractive to politicians at this juncture.

  • Comment number 37.

    #1Chris Clark asks the reasonable question: why isn't QE inflationary?
    The simple answer is that QE is ONLY NOT inflationary when it's matched by similar quantities of net debt repayments. Because it's natural for households and businesses to pay down debt when an exceptional recession hits, those sensible precautions by householders and businesses serve to reduce the supply of money. [QE is definitely inflationary when people are not so risk averse.]
    A fall in the supply of money (or the amount of debt) cuts purchases and leads to further falls in output and even more debt repayment and emergency savings by households and businesses. That fall in money supply changes a recession into a depression like the 1930s.
    For those reasons, QE during a period of exceptional debt repayments is not inflationary. Judging exactly how much QE is necessary to offset current and imminent debt repayments is not a science. It was an informed guessing game by the BoE: easy to under or over estimate.
    If all the BoE & Government stimulii of low interest rates, VAT cuts, benefit hikes and QE were working, we'd have expected the US & UK economies to return to growth over the winter months. And that the GDP growth would have led to falls in expected government and company deficits. Which is what is happening in the USA and (to a lesser extent) in the UK too.
    If annual inflation rises and then stays above expectations, that might mean the stimulii were a bit too strong.
    I hope this explanation helps.

  • Comment number 38.

    Stephanie wrote "Even if inflation expectations are ticking up, there's also little sign that workers are extracting higher pay rises."

    Some of us were employed during the hairy and scary 70's, when 5% inflation would have been nirvana. During that time wage inflation (and strikes) chased the inflation dragon's tail. We need to get worried when strikes and inflationary pay rises increase.

    However the difference between the 70's and now is that our manufacturing industry has been hollowed out and as you succinctly put it, we are no longer price setters. So perhaps world inflation or a bigger slide in the pounds value are the really scary scenarios.

  • Comment number 39.

    You sucked me back in guys!

    Please may I just point out that inflation averaged 3% pa from 1997 to date. From 1992 to 1997 it averaged under 3%.

    Nuffink to do with QE! We have that little delight still to come.

    At the present time, people with spare cash are paying down their debts.

  • Comment number 40.

    Stephanie wrote:

    "In the meantime, we can comfort ourselves that domestic inflation is still - more or less - under the Bank of England's control. Even in a globalised world, the bank can still, in the end, control the amount of money flowing through the economy, which means it can stop inflation taking off as well. "

    1. Inflation is only under control if you ignore the largest and most damaging aspect of inflation - so live in an economists cloud cuckoo land if you must, but in the real world inflation is well over 10% (including asset price inflation) and completely out of control.

    2. The Bank of England cant control anything as it has no control over the largest creator of credit - the creation of tradable CDOs and other derivative products. These created and still creates vast amounts of money and completely distort the money-supply - the Bank knows this - it knew this throughout the last decade and did absolutely nothing about it.

    3. If the Bank can control inflation why didn't it do so with asset price inflation?

    May I suggest why the OECD issued its 'unusual' report - it did so at the covert request of the Bank of England because the Bank knows it has failed abysmally over inflation for the whole of the last decade and wants support for fixing the problem from an external source. It knows that house price inflation matters. It knows that it was completely wrong to ignore it for the whole of the last decade. The Banks hasn't go the guts to admit its own error so it engineers a foreigner to balme for doing what it knows it should have done all along. Rates up now Merv! PS fire all of your 200 economists they aren't even worth the heating bill.

  • Comment number 41.

    Inflation is always a worry

    It is still unclear in my view, which contradictory pressure will win.

    Whether it will be the clear difficulties in the EU which will clearly impact on our ability to export on the one hand, or will it be the weakness of sterling elsewhere

    The UK economy is clearly going to go through some pain dealing with deficit reduction, and recent evidence very much indicates that many are paying down debt, which is also removing 'spending' from the economy

    Raising interest rates now is something that only short sighted people that base their entire theories on what they read in books would suggest

    In the real world, it is obvious we need to make monthly assessments as to when we should review rates

    The government should start to ensure we grow more food, and waste less food, as being an island, this is just a bit more important than if we were not

    With pay going nowhere, which is usually the danger with inflation, we can take a loose view, as opposed to stifling the embryonic recovery which may start to happen in coming months

  • Comment number 42.

    Let inflation rip and wipe the slate clean. The shreds pension will be peanuts in 10 years.

  • Comment number 43.

    The short answer is "yes" we should be worried about inflation. The reasons depend on where you are in your life and whether you have a job and savings etc... The situation for pensioners on fixed incomes is so different to someone in a job or who has a mortgage etc...

    We currently have relatively low wage inflation as opposed to 1976. The main inflation so far is due to our currency buying less affecting imported goods especially oil. Raising interest rates in the UK won't directly affect the cost of our imported goods but could affect the currency rate.

    We could be in for a period of deflation as anyone with spare cash is sought after to spend it, followed by rapid inflation as the government attempt to inflate the debt away. However, old age pensions, civil services salaries, civil service pensions and PFI are all effectively indexed linked so it will be very difficult to inflate the deficit away.

    On top of all this, if we have no spare cash to buy stuff, what makes our politicians believe that other countries populations have? To worry us even more, the money supply(M3) in the US is plunging at a rate similar to the 1930s.

    If interest rates go up then mortgage owners will be hit, reducing their income. This is inflationary for them but if anyone wants a cut of any spare cash the mortgage payers have, then they might reduce their prices, providing deflation.

    My warning is that if pensioners get taken to the cleaners now, then ultimately they may drop into pension credit benefit, so we may fix the short term issue but get caught long term. Projected figures are for an increase of 3 million pensioners to a total of 19 million.

  • Comment number 44.

    Stephanie, it is interesting how when you analyse an inflation figure you always want to take energy prices out, as if this somehow doesn't matter, when to most people (non economists obviously) it does matter, a lot. You need to learn to deal with the fact that when energy prices go up it affects inflation, just as it does when they go down.

    Inflation in the UK has been engineered on purpose, it is nothing more than another stealth tax. Printing £200 000 000 000 and devaluing the pound when we are massive importers was always going to be inflationary.

  • Comment number 45.

    It is clear we are now entering the stagflation phase. The stage is set. At the mere hint of deflation, QE will jump into action. Inflation is here and adjustment of interest rates will not affect inflation, it will impact upon economic growth output.

    Of course we should worry about inflation, we do not know how high it will go and have little influence over it, without sending the UK spiralling back down!

  • Comment number 46.

    Many categories of private worker's pay has stagnated for several years. Similarly, pensioners have seen their four-weekly (bought and paid for) state income only rise by just a few pence for many years. Food, heating and especially fuel have been rising in price at unprecedented rates well in excess of the (labour) government's published RPI statistics. None of the National Insurance income was retained and invested to keep up with foreseen increasing demand. It has all been squandered, like fuel and licensing taxation from motorists, on non-essential pet schemes like Tony's wars and the vested interests of government cronies

    I'm pretty sure that the true rate of inflation is far nearer 9-11%. Labour's own recent tax and duty double-whammy on fuel has ensured that every commodity sold in the UK now costs considerably more - solely due to delivery costs. 500g of plain cheddar now costs nearly £6.00!

    The sooner the new government publishes what they now know about Labour’s profligacy, the sooner we’ll all be able plan our personal budgets instead of being hit by new revelations on a weekly basis.

  • Comment number 47.

    #4 >>To think that the Bank of England has any control over inflation with the level of fiddling they can do and keep the cost of government borrowing as low as possible is crazed.

    To utterly distort an ancient saying - Hope springs eternal, when facts are consistently ignored !!

    One other thing that you may have forgotten to mention - The Bank of England has absolutely no control over the amount of inflation that's exported (or not, as the case may be) to countries whose cheap goods we import by the ton-loads !!

    As those imports decrease, so too, will the inflation increase to reflect the true rate of inflation !! To wit -

    http://news.bbc.co.uk/1/hi/technology/10176138.stm

    and

    http://news.bbc.co.uk/1/hi/business/10184186.stm

    When bosses from that renegade province are forced to raise the pay of their workers at their Chinese factory by 20%, even as there is a frenzy for the goods they produce, *Their* inflation will be imported back to Britain !!

  • Comment number 48.

    45

    If the deflationary pressures, and lower wages inflation don't cool prices, the you could well be right

    I still think it is too close to call

  • Comment number 49.

    43. At 6:54pm on 28 May 2010, Nickwh wrote: "... However, old age pensions, civil services salaries, civil service pensions and PFI are all effectively indexed linked so it will be very difficult to inflate the deficit away."
    ==============
    You are mistaken that the State Pension is index linked in any meaningful way - please read my #46 post above. When the basic state pension is set at poverty rates in the first place, any annual 1.5 - 3.0% index linking translates into less than 10p a month in real terms. Hence my worry about galloping inflation on food and other essentials.

  • Comment number 50.

    49. At 7:33pm on 28 May 2010, fastbowler wrote:
    43. At 6:54pm on 28 May 2010, Nickwh wrote: "... However, old age pensions, civil services salaries, civil service pensions and PFI are all effectively indexed linked so it will be very difficult to inflate the deficit away."
    ==============
    You are mistaken that the State Pension is index linked in any meaningful way - please read my #46 post above. When the basic state pension is set at poverty rates in the first place, any annual 1.5 - 3.0% index linking translates into less than 10p a month in real terms. Hence my worry about galloping inflation on food and other essentials.

    Rather ironically, state pensions are about to be linked to average earnings, which could well be lower than inflation for some years, in contradiction to all usual economic thinking

    Pensioners , especially recent pensioners are not going to be having an easy time of it

  • Comment number 51.

    Those (year on year) inflation figures don't mean anything other than fluctuations in the oil prices and the cost of imports.

    The velocity of money and amount of money is not in fact regulated by the central bank either.

    What Stephanie seems to suggest is that (some) businesses will be able to save if the GBP devalues by exporting more (because of a devalued GBP), but only if businesses reduce the cost of labour to compensate for the increase in import costs (because of a devalued GBP).

    Of course, demand for British exports isn't going to compensate for real deflation for all the rest of the UK domestic business. Also, devaluing the pound will exacerbate what is actually a thinly veiled deflation - nominal prices will be under downward pressure while real costs increase.

    The will result in increased stress on the state, more real costs to the state, less tax revenue, and a further devaluing of GDP. The situation could feedback on itself.



  • Comment number 52.

    It's ridiculous on the whole that people are talking about inflation. These figures are only about external commodity speculation and import costs.

    People are concerned with paying down debt, and the UK is desperately in need of paying down private debt - more so than Greece is in need of paying down public debt, though this is hardly ever mentioned.

    Any increase in real costs to individuals will increase the debt burden and magnify the real cost. This is why businesses will not be able to reduce labour costs, just as the central banks will not be able to raise interest rates.

    The fundamental problem is debt. This can only be eliminated through state intervention in money creation (debt issuance through private banks). This is something the central bank does not actually do. It will be a painful 4 years before the UK reverts to a more socialist approach.

  • Comment number 53.

    re #42
    If Fred the Shred's pension will be peanuts, then mine will be negative peanuts, negative hazelnuts and negative brazils, never mind the cashews. Have you seen the price of cashews, recently?

  • Comment number 54.

    52 oblivion wrote
    It will be a painful 4 years before the UK reverts to a more socialist approach.

    It is the 'socialist' approach that caused this mess!!!!!

    Gee, thanks Gordon

  • Comment number 55.

    There are some very worrisome signs re the UK economy. I'd say it time to worry about the whole stinky kettle of fish.
    First (and perhaps most significantly) I haven’t seen any real action to control the UK deficit; lots of talk, but no real action. Yet without a doubt the UK is one of the STUPUD PIIGS (as are Spain, Italy and Greece).
    If budget deficit cutting does not start happening soon
    - inflation will take off and
    - interest rates will be forced up.
    Another cheery note, Mr. Cameron himself pointed out that the British State is borrowing one pound for every four it spends. He admitted that the UK’s budget deficit is now set to overtake Greece.
    Mr. Cameron seems to be aware that getting deficit down (and keeping it down) is a top priority to
    - restrain inflationary pressures,
    - allow interest rates to remain lower for longer period of time and
    - create the space for private sector investment.
    So why's he dragging his coalition feet? Greece has taken action; Spain and Italy have followed suit.
    It's not as though Mr. Cameron doesn't realize that unless his Coalition Government gets off its duff quickly, the UK will be in big and then bigger trouble.
    I don’t believe the Coalition Governmnet has the option of waiting till next year to cut deficits. The new government’s first budget comes down on June 22, 2010; the autumn spending review are set to spell out massive spending cuts across the public sector, as well as tax increases. Well here it comes and it's called austerity, but soon enough?
    One policy that Cameron announced was sort of extraordinary: a promise to implement a ‘one-in-one-out’ rule for regulation, so that ministers who want to bring in new piece of regulation will first have to identify one to get rid of. (This is not a joke!) It's brilliant, don’t you think. Bring in a rotter, get rid of a keeper; and this will tremendously help the UK recovery...
    Hmmm...
    How exactly?

  • Comment number 56.

    35. At 5:29pm on 28 May 2010, davidbrent wrote:
    Anyway (and I stand to be corrected by somone more knowledgebale), wouldn't high inflation be just a symptom rather than a cause of our long-term problems? We all suspect deep-down, even if we don't like to say it aloud, that our standard of living has peaked and we are due for a decline. If inflation is a by-product then why worry about it?
    ---------------------------------------------------------------
    You are not wrong. Unfortunately, inflation was one of the things that got us into this mess, so it is actually both. Had all goods and services deflated in the last ten years and salaries had stayed the same, we may have actually avoided the credit crunch, the banking crisis and the recession. We missed a great opportunity to really recover the lost value in Britain. We would have had money in the bank - which is where the banks needed it in the first six months of last year. But we would probably also have needed the Chancellor/PM to not be throwing cash around like confetti from 1997 on.

    That inflation has made other problems, the underlying problems one of which was inflationary growth, much worse. As an example, just one word: pensions.

    If our population is ageing and living longer it is going to be necessary for that group in society to be well funded. Pensioners of the future are going to have to have spendable cash to keep the home-based (internal) economy of the future UK viable. Inflation will start to make that even more impossible. We are not just staring down the barrel of a gun, one gun, we are instead looking, wide-eyed, at an arsenal of them.

  • Comment number 57.

    I share the attitude of Skid427. Stephanie peddles the old lie that devaluing sterling (that's what's happening) will make us more competitive. In my lifetime (52 yrs) we have devalued against the Mark/Euro by a few hundred % and we still can't keep up. Prepare for further weakness when the current crisis stabilises a bit.

  • Comment number 58.

    55

    I don't disagree with your comments on the analysis, yet feel your comments on the speed of action are somewhat harsh

    Already the 6billion have been announced, and quite rightly the new ministers will need to make the in year cuts in their relevant departments

    The emergency budget date has been set for 22nd June, as I am sure you know, and this is when further and greater detail will be given

    The full spending review, cynically delayed by Darling, will be even more revealing in the autumn

    Personally, I don't see how the government could act more quickly than this, on these three fronts, without being accused of being impetuous and lacking any thought

    When you stop, and think that the previous administration strung out the election until virtually the last minute, that it was spending so rashly, as for senior civil servants to request letters of direction, and that their only gift to the Conservatives was a letter confirming that the money had run out, then frankly the contrast is massive

    Cameron again spoke honestly today, and I just think on reflection you may even agree that you are being harsh

    The point with regulation on business, is that it is a drain, costing billions with all of Labour's, and the EU's extra regulation

    The point Cameron was making there, is enough is enough

    The level of regulation will NOT increase, so any new regulation will lead to exisiting regulation being removed

    This is important, as ALL future growth in the foreseeable future needs to come in the private sector

    Getting the decisions right is vital, and please try not to be so impatient

  • Comment number 59.

    40. At 6:13pm on 28 May 2010, John_from_Hendon wrote:
    "May I suggest why the OECD issued its 'unusual' report - it did so at the covert request of the Bank of England because the Bank knows it has failed abysmally over inflation for the whole of the last decade and wants support for fixing the problem from an external source."

    JFH you keep banging on about the BofE and Mervyn King although it has been pointed out to you that the Bof E was emasculated by it's terms of reference given to it by the Brown in 1998.

    For the sake of posterity please click this link and tell us how Eddie George or Mervyn could have done a thing to avoid our Brown "no more boom or bust" catastrophy with these limited terms of reference?

    [Unsuitable/Broken URL removed by Moderator]

    The problem was the split of responsibility between the B of E, the Treasury and the FSA - none of whom had proper oversight over the economy, which I presume the member for Kirkcaldy had by virtue of being the Chancellor.

    Hopefully an increased role by the B of E on monetary affairs will perhaps enable us to emerge stronger from this recession(?) with a better insight into inflationary policies amongst other things.

  • Comment number 60.

    54. At 8:21pm on 28 May 2010, Kevinb wrote:
    52 oblivion wrote
    It will be a painful 4 years before the UK reverts to a more socialist approach.

    It is the 'socialist' approach that caused this mess!!!!!

    Gee, thanks Gordon


    Hmm. If the capitalist banks had not been bailed out by the previous government the budget deficit would not be nearly so problematic as it is. You cannot blame this solely on Gordon Brown's government.

    Would you have preferred the last government to let RBS and HBOS collapse? If so, what do you expect the consequence of that would have been?

  • Comment number 61.

    60. At 9:11pm on 28 May 2010, misery_index wrote:
    54. At 8:21pm on 28 May 2010, Kevinb wrote:
    52 oblivion wrote
    It will be a painful 4 years before the UK reverts to a more socialist approach.

    It is the 'socialist' approach that caused this mess!!!!!

    Gee, thanks Gordon

    Hmm. If the capitalist banks had not been bailed out by the previous government the budget deficit would not be nearly so problematic as it is. You cannot blame this solely on Gordon Brown's government.

    Would you have preferred the last government to let RBS and HBOS collapse? If so, what do you expect the consequence of that would have been?


    In the private sector the failsafe is that if you get it wrong, the company goes bust

    HBOS should have been broken up, instead of Darling 'encouraging' Lloyds TSB to buy them, when stupidly he had already blocked Lloyds TSB from buying Northern Rock

    So, having blocked Lloyds TSB buying NR, he should then have let NR go bust

    YES

    Then we would not be in the mess we are now

    HBOS could have been broken up, and RBS fully nationalised

    That way, the banking system would have been protected, and the banks would have realised that there was no ultimate safety net

    By 'saving' Northern Rock, for purely political reasons, the Labour Government indicated to the Banking sector that whatever they did, the government would bail them out

    Quite disgraceful

    By the way, Lloyds TSB was doing very well prior to this stupid decision to buy HBOS, when the market was rife with rumours about HBOS for yonks

    Barclays and HSBC were also doing very well

    So this view that 'the banks' needed rescuing is not quite true

    So, this is the root cause of the current dilemma

    Brown's overspending before the banking issues after 2002, was hugely to blame, as was his desire to over complicate everything in his desire to )incorrectly0 prove how clever he is

    The old saying too clever by half is relevant here

    So, tax and spend, the socialist way, very much to blame yes

  • Comment number 62.

    60 wrote

    Would you have preferred the last government to let RBS and HBOS collapse? If so, what do you expect the consequence of that would have been?

    The consequences of Northern Rock being allowed to go bust, and HBOS being broken up, would have been that the banking industry learned a valuable lesson

    There IS no safety net

    If you screw up, you go bust

    This lesson is still not learned

  • Comment number 63.

    62. At 9:31pm on 28 May 2010, Kevinb wrote:
    "The consequences of Northern Rock being allowed to go bust, and HBOS being broken up, would have been that the banking industry learned a valuable lesson"

    Kevinb we seem to be a bit off topic - inflation - but you know why RBS, HBOS and NR were saved - Politics, Labour strongholds when an election was due in the following 2 years maybe? The member for Kirkcaldy did nicely in the NE and Scotland!

  • Comment number 64.

    63

    I was replying to a direct question, so yes, off topic

    You are quite right in your comments, as well

  • Comment number 65.

    Several of my German suppliers (distributors) have warned me that significant price rises are coming with the next shipments, based on the Euro's fall against the dollar. Although the pound is slightly higher against the Euro, the overall impact is a significant rise.

    So I think we are likely to see another up-tick of inflationary input prices over the summer. I am very concerned that these, especially if added to by higher VAT, will continue to kill off the demand for my products. I'm sure I'm not the only reseller of imported products who is having to completely re-evaluate their medium term business strategy.

  • Comment number 66.

    65

    I am beginning to think that VAT must be left alone until this inflation has reduced a bit, otherwie it could really hinder any chance of any progress

  • Comment number 67.

    Another good reprise of inflation.

    My take, however, is slightly different.

    1. the 2% target for inflation is entirely arbitrary - it could be 1%, 3%,4% etc etc. In fact I think there is an implicit approval for a higher level of inflation by the powers that be - it does reduce the real value of existing debt at the expense of savers and those on fixed incomes.

    2. The fact that interest rates have not gone up is, I believe, to help the economy. They will have to rise but I would be surprised if they'll go up too quickly - too much potential for personal debt default etc. Again I think this is on the lines of a nudge, nudge, wink, wink, say no more basis.

    3. The CPI and RPI figures are a fiction anyway - it is just some typical stuff bought by consumers etc but DOES NOT include industrial goods etc.

    4. The key to inflation is keeping it stable but we are at the mercy of a weaker £ when it comes to importing the consumer durables we purchase - mostly from abroad so yet again we are effectively exporting our money abroad.

  • Comment number 68.

    We should be worrying about the mountain of debt first, then worrying about the inappropriately low interest rates which distort the economy in favour of debtors rather than investors and only then should we be worrying about inflation...

  • Comment number 69.

    @61/62 - I appreciate your answer and acknowledge its content but it sounds like you are saying that a Labour government is responsible because it did not intervene timeously to prevent the failings of capitalist banks.

    Seriously, if capitalist banks need to be taught lessons in finance by a Labour government it is clear that the highly paid, bonus rich, gilded pension pot capitalists running the capitalist banks were the failures and that some responsibility must be laid at their door instead of the entire blame being shunted onto a government you didn't like anyway.

  • Comment number 70.

    Apologies for persisting off topic but blaming it all on Labour is false and risks being partisan in finding a way out of this mess.

  • Comment number 71.

    69. At 10:10pm on 28 May 2010, misery_index wrote:
    @61/62 - I appreciate your answer and acknowledge its content but it sounds like you are saying that a Labour government is responsible because it did not intervene timeously to prevent the failings of capitalist banks.

    Seriously, if capitalist banks need to be taught lessons in finance by a Labour government it is clear that the highly paid, bonus rich, gilded pension pot capitalists running the capitalist banks were the primary failures and that some responsibility must be laid at their door instead of the entire blame being shunted onto a government you didn't like anyway.

    Frankly, you are being a touch dim here

    IF you care to read what I have written properly, the fact that I am suggesting that NR should have been allowed to go bust, and HBOS broken up, would suggest to anyone thinking about it sensibly, that I have nothing but contempt for the senior management of both companies

    I utterly condemn them, they are a disgrace

    Equally, the senior management of RBS, which was the sensible company to nationalise, due to the structure of the business, and the fact that it is basically a sound bank which made poor decisions, as opposed to HBOS and NR which were frankenbanks

    You should realise that I equally condemn the senior management of these companies as well

    Brown created he FSA, and most of the people in the FSA had no control over the banks, and NR were not supervised properly, neither were HBOS in particular

    The FSA are also liable, as is that numpty Brown who spent so much time in awe of the City, that he didn't notice that some of it was going rotten

    So I equally hold Brown directly responsible, yes, for poor strategy, and Darling for causing the run on NR by his indecision

    As above, Brown then contemptible for not allowing NR to go bust for political reasons alone

    The previous Labour Government has a lot to answer for, as do the Banks I mention, for their ineptitude

    Our other banks have been hugely damaged by the actions of the Labour government, as without their inept interference in HBOS and NR, the other Banks would have stepped in, and we would not have had the crisis of confidence

    So, to be honest, I don't really like the Labour Government for very sound reasons

    Don't even get me started on the vomit inducing sight of Alastair Campbell on QT trying to pretend that the dossier was not sexed up, and that we didn't just invade Iraq because of the WMD

    In case he didn't realise, regime change is actually illegal without UN mandate

    Which we did not have

    So, no, I do not like the Labour Government, for what they did to damage MY country, in whichever area you care to name



  • Comment number 72.

    #71 Kevinb,

    It is not your country it is OUR country. Never forget more people voted in opposition to the Tory party than voted for it.

    Now you can keep on with your innane rant about the former government - but it is so tiresome!

    Now back to the real topic - INFLATION.

  • Comment number 73.

    @71 - Thank you for your response. I may be a little dim but at least you have now explicitly acknowledged the role the bankers played in creating this mess. That was all I sought given your post @54 which doesn't mention the bankers (I hadn't ever tried to consider the bankers as being party to "the 'socialist' approach that caused this mess!!!!!")

    For what it is worth I also wanted Labour to let the banks collapse and I am furious that they didn't - but I am more furious at the bankers on that focus.

  • Comment number 74.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 75.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 76.

    We are back on the curve well established before Nulab. Take the synthetic boom bubble away and that is what can be expected. Under the bubble the decline continued. The fundimental problem is the steps which should have been taken were not so the position is that much more entrenched. The readjustment will be that much larger. The fact that the current administration are now banging on about the private sector tells you how bad the situation is. The private sector remains vulnerable to low cost zones, further negative impacts are due. Skill bases have been destroyed, industrial infrastructure depleted. It is a a matter of critical mass. It is reasonable to postulate that some remenents of industrial sectors are the living extinct as they can no longer pass on knowhow and critically there is no mechanism to fund the transfer once a infrastructure has failed. This is why some countries and corporations have deliberately targeted sectors and undermined them with cheap imports. Once domestic manufacture has gone there is no price war and import prices can and do rise. Other countries will not stand still and are on an accelerated tech curve. Vince Cable is correct to identify that effectively economic sectors have been operating in parrallel without linkage or interconnection, eg financial sector v manufacturing. However the clinging to the idea that the private sector aka manufacturing can somehow be built up provide growth is optomistic unless the key issues undermining the private sector are addressed. The dilema is that tax breaks and low labour costs the usual tricks can only reduce tax revenues. BTW Please dont bother posting about hi-tech, China now leads in many high tech areas such as high performance batteries. The batteries in your mobile phone are under Chinese business patents. There are other ways (other than tax breaks etc) of dealing with the low labour zones but they too do not yield the UK tax revenues needed to carry the current UK public sector load. The reality is no real impact has been seen yet other than the first stage of currency devaluation. A whole 1 percent of cuts are being enacted when the public sector had 2 percent growth last year. The 'rebalancing' needed is very considerable.

    Today there is another example of the problem - The UK news presents a report a UK car maker is taking on workers where a multiple of that figure were let go recently. Good oh. However look a bit deeper with the same company and a devlopment in China is in process 'The company said the move into China is not a shift out of the UK'. Really, how can anybody describe expansion into the East as not being a long term strategic move and the operational focus centre moving outside the UK however incremental. This is understandable, but quite how if fits with Vince Cables ideas of the private sector providing UK growth is more difficult. Incidentally this sort of dynamic has been going on for some considerable time. A big name aircraft manufacturer in N America was told way back if you want to supply planes to China you effectively move to China, R&D, Manufacturing units etc etc. They did and very significant job losses in N America followed.

    On todays news there was another (economist?) berk blathering on that he found it strange that teddy bear manufacturing - which he had appeard to pluck out of the air, shows how much he knows about industry, absolutely zilch it would seem - he found it strange this was given more potential emphasis than UK universities earning money training foreign students. Hmm. Couldnt quite get his head around the fact that one of the problems historically has been precisely that happening, the transfer of knowhow abroad, although even that is heading for reduncancy as abroad now has centres of knowhow excellence.

    To further compound the picture. We appear to be in an age where government is corporate in mentality. UK Plc. I therefore expect all the usual corporate tricks of using psychology and marketing to package policy. So getting rid of ID Cards is not cost cutting it is Big Society whatever that may be, particularly a Mrs Thatcher said there was no such thing as society. A spoonful of sugar helps the medicine go down. So any message can be listed as potentially doctored then.

    Note to kevinb. You posted to the effect that inflation affected cash not wealth when my reference was to wealth erosion only. What is cash other than wealth or part of wealth. Further unless my memory is mistaken I believe you will find Prof D Blanchflower has previously used that context. If it is good enough for Blanchflower its good enough for me, I am not a economist, I am UK based in business dealing directly with customers in a number of countries all over the globe, all points it would seem. I have however to operate in an mess of an economy created by others which clearly has been manipulated to the benefit of a section of the population not for the benefit of all. The bottom line is the UK is a relatively good place to be a citizen and quite frankly a relatively problematic place to run a business. Until there is movement on this balance then the UK will categorically continue to decline overall and therefore individual wealth erode by one mechanism or another. Whatever fillip is put in place will be temporary until the imbalance has been properly addressed, addressed not eliminated, and adressing it will mean the unavoidable dismantling of constructs yielding tax and therefore the provision of public service as we know it. That is your likely future if you are in the UK.

  • Comment number 77.

    71 kevinb

    yes

  • Comment number 78.

    72 forelockdave

    No

  • Comment number 79.

    Hang on a minute people, surely a huge amount of what we are seeing is supply and demand pricing and not real inflation (ie. ratcheting up of labour costs)at all. As far as my limited expertise can rationalise as long as wages don't rise in response, demand will be choked off (or supply will be increased) which means prices will go back down again (much like happened to oil over the last 2 years).

    In addition UK manufacturers should be licking there lips at the prospect of a weak exchange rate. Yes imported raw materials cost more but the selling price of the corresponding export should de facto go up in sterling terms proporionate to the exchange rate fall and the absolute margin increases as a result. Of course the exporter could hold the stirling margin fixed and have a lower foreign currency price thereby being more competitive and increasing market share.

    The really important thing as far as I see it is wage restraint. Theoretically with high unemployment this should be given and is something that just about anyone in manufacturing has experieced for real for the last three years. Going back to Stephanies previous blog, it's time for the public sector to come into line and realise that when your income is reduced you can't afford to pay yourself an increase however much you'ld like one.

  • Comment number 80.

    #78 YBR,

    Your argument is very flawed.

    "What is cash other than wealth or part of wealth." Cash may be many things but it most certainly is not wealth. A major part of the reason that the whole world is in the mess that it is rests upon this miscomprehension.

    "the UK is a relatively good place to be a citizen and quite frankly a relatively problematic place to run a business." Here we go again the usual bleeting from businessmen that they face too much red-tape, etc. etc. Strange isn't it that in European terms UK business is comparatively inefficient whilst facing the same levels of regulation and arguably the same level of tax.

    So I give you back your solo response - NO

  • Comment number 81.

    I suspect we are actually in a deflation scenario- the only inflationary pressures are increased taxation on Petrol,Alcohol and Tobacco and rising oil prices. Talk up interest rates is to suit those with savings, and hit most of us now with borrowings.
    Banks are whining, but mine ring me up all the time to get me to increase my mortgage- with 30% borrowing against equity and trying to get me to pay 5.9%- and Base rates are what. The greed of these Banks will be our undoing-wish i could borrow a £1.00 at 1% and lend it at 5%.

  • Comment number 82.

    Well to be honest looking at the graphics as you have presented them it would appear that of the 3.5% inflation 1.6% is down to indirect taxes i.e. VAT increase, and probably things like fuel duty on petrol so we have market inflation of only 1.9% almost bang on the target of 2.0%. Now we all know that this market inflation is being driven mainly by overseas market demand for commodities, and the devaluation of GBP.

    Now looking at global commodity prices they have risen by about 6% since end of Dec 2009, and GBP has dropped against the dollar by 6%, therefore the combined real term inflation expection of commodity prices based on this simple analysis would suggest inflation of 12%, so there is obviously massive deflationary items in the mix too. Does anyone seriously expect me to beleive domestic interest rate increases of 3.0% to have any significant bearing on inflation in the UK. When global commodity prices are these days driven by growth in BRIC's and excess qe funds looking for a home? Yeah that's what i thought not likely. The reality is in todays world there is a growing population, and a growing "affluent aspirational" population at then emerging, all competting for finate resources. Basically the pie is only so big and more and more people want a slice of it. The price of that pie is going to continue to get more expensive and we have to come to terms with only being able to afford a smaller portion. At least until science provides us with equally growing supply of energy supply, food, water, space and sythesized essential metals, salts and other chemicals. The dominence of the West is over, if we are lucky the West's decline and the BRIC's rise will end in equilibrium, then one day Africa may join the table and there will be another rebalancing.

  • Comment number 83.

    It worries me that the Bank of England has in recent history lost control of its regulatory position concerning inflation and interest rates. With the Conservatives desperate to further deregulate the banking system by removing the FSA and using the disfunctional Bank of England the global congloerates will further profit.

    How much of the see-saw share and currency markets is down to short selling or improbable fear of debt problems? I have yet to read of any problems in Iceland where the population voted not to pay its large debts to other countries following its own banking collapse. Has there been world-wide, even IMF, condemnation of Argentina for telling its debtors to get lost? So why the present furore concerning British Government Bonds that do not mature until 2014? Plenty of time to build the wonderful future recently promised by President Cameron, oops or is that just the media/Murdoch view (seen the cover of The Sun 7 May).

    It was the 80s destruction of British industrial capacity, following decades of none investment by private and nationalised managers. A government view that industry was non-competitive, with investment capitol released abroad for greater profit following the release of currency restrictions by the first Thatcher government. Booming days for international tourism; bankers; and greedy company directors looking to cheap labour. However, the result was the expensive destruction of communities and social cohesion that we reap the benefits in the 21st century. Dame Margret sits as an un-elected Lord, observing the installation of her Boy David declaring a political gerimandering that was trialled by Lady Porter, but that even the Iron Lady would not have dreamed of imposing. The problems of greed and incompetent management led to banks toying with customers money and businesses in a gambling frenzy where the rules they created were only the customer was loser.

    To burden the tax paying public with the burden of paying for the proflogacy of greedy directors interested in bonuses and perks; politicians seeing taxpayers money as a gravy train that persists even beyond the so called tightening of expenses; the once staid public servants seeing the slush fund and wanting their share of the excess, is tantermount to a famous finger gesture.

    The increasing club of economic forecasters who could not tell you the price of a cup of coffee tomorrow; searching the entrails for measures that will protect their wealth at the expense of those less fortunate. Why not nationalise the lot, lock, stock and bank? If Cameron is for decentralising and co-operative enterprise then go the whole hog - give back the means of production to the workers. Oops that was a clause that the lesser Conservative Tony Blair did away with. Market forces have demonstrated handsomely in the land of the free market that when greed is let loose all but the top 5% suffer, just take a trip around Detroit or Chicago; swathes of middle America and the Southern States to see what the charade of markets produces. Yet still we have experts trying to convince us that they know what will happen; that they have the secret calculator that shows what financial medicine to take.

    Let's see what indicators we have: North and South Korea with booming neighbours dragged into a nuclear conflict by a failling dictator; BP dragging oil exploration to a halt by destroying the Gulf of Mexico and declaring itself bankrupt to avoid the clear-up costs that internationally could not be payed for; Iran completing its nuclear programme and demostrating to Isreal what a nuclear threat to its neighbours really means; Pakistan degenerating into religious meltdown with insurgents from Afghanistan creating religious fervour over Kashmir and war with India; America's trillion dollars of debt renegade following the election of a right-wing Republican hockey-mum. What value a pound/euro/dollar if even just one of those comes to fruition? So what are we worrying about, I have it on good evidence from various cultures and religious organisations that the world is going to end in 2012 - so live the life of a Bank Director; Premier League footballer; reality TV non-personality (with the help of Max Clifford)? Yet another expert casting bones and entrails and telling us little that we had not already realised since late 2007 that those with little are going to pick up the bill for the rich bastions of commerce; finance; politics and industry who have run off with everything to gated-communities on some island in the Carribean.

  • Comment number 84.

    @80 - I have to agree with you.

    I apologise to everyone for remaining off focus here but had the previous government intervened to regulate well prior to the toxicities being uncovered the bleating businessmen would have claimed at the time in the mood then that it was yet more red tape getting in the way of their right to freely conduct their business in their free markets that they were demonstrably experts in. Bah humbug!

    I am always worried about inflation but unemployment scares me.

  • Comment number 85.

    "The point to bear in mind is that the effective money supply (as it determines inflation) is a multiple of quantity and velocity"

    Not quite. Price is multiplied by the aggregate value of transactions to give the 'money supply. So, theoretically, you can increase the value of transactions rather than the price if you're clever with your spending.

    Unfortunately the QE money was introduced financially, rather than being spent directly in the economy buying things of real value. And that appears to have gone straight to the price element of the equation.

  • Comment number 86.

    Somebody here should show a graph of nominal private and public debt by time including recent months, along with total GDP.

    Let's see how the private sector deleverages while the public sector gets further in debt, and let's see how anologous the situation is to Japan's, and let's see to what extent "debt deflation" characterises things.

    The economists will continue to play with self-deluding measures, while everyone else gets worse off and complains that reality differs from the news reports.

  • Comment number 87.

    86. At 07:27am on 29 May 2010, Oblivion wrote:
    The economists will continue to play with self-deluding measures, while everyone else gets worse off and complains that reality differs from the news reports.
    -------------

    Please! Not all economists!

    Nice idea about the graph, though. Could be useful information in there to wake everyone up a bit. Get twenty-five economists to discuss the results though, there will be about thirty-seven different opinions and broad agreement on how to proceed in four or five different directions.

  • Comment number 88.

    "the UK authorities, almost alone among the OECD, needed to be wary of losing their credibility", "It means we can use a cheaper currency to price ourselves back into the global market. But to boost our international selling power - and the competitiveness of UK workers - our purchasing power has to take a hit. Prices go up, but wages must not. Or not as fast"

    The UK Authorities have surely lost their credibility and did so some time ago.

    Why should we rely on a cheaper currency to get ourselves back into the global market? Surely we don't want to part of the downward price spiral? Aren't we aiming for a highly educated, high value export economy? In that case joining a price war is no way to plan a future.

    Shouldn't we expect a lower standard of living so we can invest in future high value exports to ensure we reap the benefit a decade ahead. Not a lower standard of living to entice inward investors to generate wealth for other nations; that does not work.

    And it's not that our exports are expensive it's that other countries' exports are too cheap. We need to shout loud and long for a revaluation of the yuan thereby ensuring a fairer global market for all. Or am I wrong in thinking the yuan:dollar exchange rate has to be a joke?

  • Comment number 89.

    Re 71. So, to be honest, I don't really like the Labour Government for very sound reasons

    Don't even get me started on the vomit inducing sight of Alastair Campbell on QT trying to pretend that the dossier was not sexed up, and that we didn't just invade Iraq because of the WMD

    In case he didn't realise, regime change is actually illegal without UN mandate

    Which we did not have

    So, no, I do not like the Labour Government, for what they did to damage MY country, in whichever area you care to name

    You admit to bias in your critiques. Its as well to keep the balance and mention regularly that you do not place the blame in any entirety in particular camps because you otherwise come off sounding like a tiresome bigot which is not really where I think you're at. If you take a swipe at foreign affairs and governement intervention perhaps you should read a little less narrowly/onesided about them even if economics plays a part of every thing.

    Just stick to your economics they are otherwise enjoyable and are worthy of noting.

    Re 80

    Strange isn't it that in European terms UK business is comparatively inefficient whilst facing the same levels of regulation and arguably the same level of tax.

    Right on!

    The present arguments about inflation, deflation, interest rates etc have a horrifying familiarity. They are based on long standing economic theories. I feel as if I'm reading articles from the late 1980s early 1990s. I'm not sure if we had the same amount of deficit then but one thing is for sure, it still went wrong in a big way. Must have been something external to economics?

  • Comment number 90.

    76

    Yellow Brick road wrote


    Note to kevinb. You posted to the effect that inflation affected cash not wealth when my reference was to wealth erosion only. What is cash other than wealth or part of wealth. Further unless my memory is mistaken I believe you will find Prof D Blanchflower has previously used that context. If it is good enough for Blanchflower its good enough for me

    Not sure if I was clear enough, apologies if I was not

    Unsure what Blanchflower has said on the matter, he is a bit of a maverick, so I don't take too much notice of him

    The difference between assets and cash in the point I was making, is that assets will automatically keep up with inflation, eg gold, property, valuables, so their underlying value is NOT eroded

    Cash, on the other hand, will be REDUCING in value, as the inflation growth will reduce it's buying power, unless interest rates, net of tax, are greater than inflation

    This is unlikely, and this is the differential I was seeking to illustrate

  • Comment number 91.

    72

    FDD

    I apologise if you find my comments tiresome

    The Iraq war, and Campbell's comments on it are also 'tiresome' as is the deficit, which we will be paying off for the remainder of my life if we are not careful

    So, there you go

    Calling it a rant, is a bit wide of the mark, as well

  • Comment number 92.

    73

    I just said you were being a little dim here, not that you were dim in general

    There is a slight, and important difference in the two!

  • Comment number 93.

    86

    Unfortunately, the average standard of living in the UK will fall

    Simply because it rose too quickly on the back of overspending

    That is a fact

    You may or may not be aware of the huge difference culturally with Japan

    For example, they generally save far more than us, and have far less private debt

    However, their sovereign debt as a percentage of GDP is around 216% the last time I looked, with a current account deficit as well

    I still think we could tip into a deflationary spiral, so would be interested to know which part of the Japanese situation you feel may be replicated here?

  • Comment number 94.

    88

    Ilkeston Tim wrote

    Or am I wrong in thinking the yuan:dollar exchange rate has to be a joke?

    I think it is being discussed in detail, and China has a few things to resolve currently, that being one of them

    North Korea being another, as well as the potential for higher, much higher inflation in China, and working conditions under the microscope following the 12 suicides in the computing manufacturers recently

    So it may help a touch, yet if it leads to higher Chinese export prices, then we will only be importing even more inflation ourselves

  • Comment number 95.

    89

    The comments on Campbell are not bigoted in any way

    Did you see QT?

    Would you defend what he said?

    Do you agree with Iraq?

    In view of your comments about me, I think it is reasonable for me to ask you these questions

  • Comment number 96.

    #59. dontmakeawave wrote:

    précis - Don't attack Mervyn as he was only following orders....

    This will not wash for the very obvious reason that we appoint Governors to act with integrity and to the best of their abilities. If he understood what he was doing was wrong/insufficient/inappropriate he should have resigned!

    Mervyn King (and the late Eddie George) should have resigned if they knew what they were doing was wrong. These is quite a lot of evidence that they knew what they were doing was wrong - (i.e how can a man with 200 economists not understand that CDOs etc. were creating a vast and uncontrollable pile of money? And if they did not have the guts to tell him they too are unfit for their jobs!)

    I have written evidence that they knew in the from of letters from both of them and so my only conclusion can be that there is a serious character flaw in both that let them carry-on doing the wrong thing just to collect their big fat pensions.

  • Comment number 97.

    excellent article. how can we develop what is good about the bbc and get rid of the crap - question time et al?

  • Comment number 98.

    Surely a small amount of inflation is good thing. All those people who hide their income illegally and keep it in cash would in essence be paying an unavoidable tax.

  • Comment number 99.

    94 KevinB - more expensive Chinese exports means we won't import them means we'll buy cheaper elsewhere or make things ourselves and repatriate some of our manufacturing? For too long we have manufactured our items over there and their currency just does not reflect their true competitive state. As for North Korea I wonder whether the fuss we (the West) are making abotu it is linked at all to a currency revaluation on their part. I don't mean to be a conspirancy theorist but any pressure on China (and India for that matter) can be no bad thing. Enjoy your comments generally KevinB keep them coming, learn quite a bit from them!

  • Comment number 100.

    @92 - I think that when your critiques sound one sided my senses become dulled

 

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