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Inflation: Risks on both sides

Stephanie Flanders | 10:47 UK time, Tuesday, 18 January 2011

The December inflation numbers are at the high end of expectations - with the target measure of inflation, the CPI (Consumer Prices Index), rising by 3.7% compared to December 2009. But energy and food prices are responsible for most of the rise - indeed, the 1.6% increase in food prices between November and December is the highest on record.

Person carrying shopping bags

 

No-one is happy that inflation has remained so far above target, for so long - least of all the Bank of England. With so many households seeing the effect on their shopping bills, you can see why David Cameron would want to signal recently, in an interview with Andrew Marr, that he shares their concern. Indeed, the chances are that the CPI will rise even further in the next few months - maybe reaching 4% by February or March.

However, there is little sign that a majority of the MPC (Monetary Policy Committee) is minded to respond with an early rise in the base rate. They remember that this has happened before, in only 2008, when commodity price rises pushed the CPI up to 5.2%. At that time, above target inflation led to the MPC seriously contemplating an interest rate rise, just weeks before Lehman Brothers collapsed. The Bank of England then had to slam into reverse, with unprecedented cuts in rates.

At least, in 2008, the Bank had room to slash rates to support the economy. Those who say the MPC should keep rates low point out that there isn't that kind of leeway today, if the recovery falters. They also note that inflation itself could pose a risk to the recovery.

Asked to name the single largest threat to growth this year, most would probably say public spending cuts, and the recent rise in VAT. But the recent rise in the price of energy, food and other imported goods - not to mention increases in pension contributions and the like - will probably have a much larger direct impact on the disposable income of the average household than this year's squeeze in public spending.

In predicting moderate growth for the UK in 2011, the OBR (Office for Budget Responsibility) is assuming that consumers will continue to do their part, with little change in Britain's still low personal savings rate. But, in the face of this kind of squeeze, it is surely possible that households will instead seek to cut back, with negative consequences for growth.

If that argument is right, high inflation could actually be deflationary in the medium term, and the MPC should continue to provide the economy with all the support it can get.

But of course, there is another possibility: that the squeeze in incomes will eventually lead people in work to demand - and obtain - higher wages to compensate them for their losses. If that happened, the private sector would not be able to create as many jobs, for a given amount of demand, as the OBR is expecting, meaning that unemployment would stay higher, for longer.

A broad-based rise in wages would also, almost certainly, trigger a response from the MPC. Naturally, the committee that sets Britain's official interest rates will be watching the inflation figures over the next few months. But they will be looking just as closely at what happens to wages.

Update 1240: Most City analysts have taken today's inflation numbers in their stride - many of them urging the MPC not to be "spooked" into raising rates. But Simon Ward from Henderson Global Investors has some interesting points to make for the other side. Here's what he says:

“It has recently become fashionable to quote the tax-adjusted inflation measures, CPI-CT and CPIY, which are running well below headline inflation, at 1.9% and 2.0% respectively (up from 1.5% and 1.6% in November.) CPI-CT is calculated at constant tax rates while CPIY excludes indirect taxes altogether.

“These measures, however, understate "true" inflation because they are calculated on the assumption that indirect tax hikes are passed on in full to consumers. ONS research on the December 2008 VAT reduction from 17.5% to 15% indicated pass-through of only one-third. Assuming that one-half of the increase in VAT and other indirect taxes last year was reflected in the prices charged to consumers, inflation would now be about 2.8% had tax rates remained stable.

“The current inflation overshoot should be viewed in a longer-term context. The consumer prices index for December was 4.4 percentage points above the level implied if the Bank of England had achieved 2% inflation since the target was switched to the CPI in December 2003, implying an average overshoot of 0.6% per annum. The RPIX measure (i.e. retail prices excluding mortgage interest costs) has exceeded the previous 2.5% inflation target by 5.3 percentage points over this period.

"Advocates of a rise in interest rates are not "inflation nutters" but believe that believe that action is required to prevent an upward drift in inflationary expectations that would worsen the output-inflation trade-off, thereby depressing medium-term growth prospects.”

The point is well made. It is simplistic to look at CPIY or CPI-CT and say, just because they are below 2%, there is no reason to worry. After all, those aren’t the measures of inflation that the MPC is legally obliged to target. Nor do they correspond to any common understanding of inflation. When we get to the check-out, we can't ask the cashier to charge us only at "constant tax rates". We have to pay the whole lot.

It's also worth remembering that these, more "benign" measures of prices rose just as much as the target measure in December. CPI at constant tax rates rose by 0.4 percentage points between November and December, from 1.5% to 1.9%; CPIY rose from 1.6% to 2%. That is what you would expect: the rise in VAT in January can only have affected the December figures indirectly. Food and transport prices were doing most of the work.

I don't get the impression that the MPC relies too heavily on either CPIY or CPI-CT in making their judgments. They are a rough indication of what might be going on beneath the surface - nothing more.

Like Mr Henderson, their focus is on what these high inflation figures might mean for future wages and inflation expectations, and ultimately, the long-term potential growth of prices and the economy. But for now, at least, they are drawing a different conclusion.

Comments

Page 1 of 3

  • Comment number 1.

    And the BoE are not even fiddling while we burn!!!!!

    When will they raise interest rates, too late possibly, for the train has already left the station. And don't mention the price of the ticket.......

  • Comment number 2.

    Fair enough to talk about CPI as the Bank of England measure but RPI is a much better indicator of real inflation for individuals. By omitting to mention RPI you are only helping reinforce the government sleight of hand in aligning public sector and many private sector pension increases to CPI, which even the government's own advisors, as well as other professional bodies, say should only to be used when amended. CPI is consistently less than RPI except when inflation is extremely low. No surprise then that one of the government's first actions on coming to power was to make this CPI/RPI change. All to do with cost, not because CPI is a better measure as claimed.

  • Comment number 3.

    What more do the MPC want before raising interest rates? If this is not done now, we'll have double-digit inflation in two or three years' time, which will require double-digit interest rates to stop it.

  • Comment number 4.

    The inflation numbers for the UK have been a problem for a while. Some have chosen to stick their head in the sand and ignore them although that must be getting harder and harder as it continues to rise. One who predicted this has come up with an interesting view on it.
    "Furthermore I would now be considering edging interest-rates up to 2%. However care is required here and many in the media do not take care. If you take the view that a neutral level for UK interest-rates is around the 4.5% level then my policy remains expansionary simply less so than the current one."
    One of the factors underlying this view is concern that the sharp reduction in interest-rates put us in a type of liquidity trap.Either way he has been right so-far.
    http://notayesmanseconomics.wordpress.com

  • Comment number 5.

    They cannot raise interest rates, not for the reasons described above, but for the very simple reason that any significant rise would cripple the banks again.

    Many UK, US and European financial institutions are still fundamentally insolvent without support through low interest rates, QE, and various other covert measures. Raising interest rates would immediately trigger falling property prices and the resulting collapse in the value of bundled mortgage products and their derivatives - ANOTHER BANKING BAILOUT WOULD BE REQUIRED - is this possible? I don't think so. And so, there will be no rise in rates this year.

  • Comment number 6.

    Price inflation high and rising. Wage inflation not so. Perhaps a rise in indirect tax (VAT - on prices) and not in direct tax (NI - on wages) was very shrewd. Or so cunning even Gordon Brown would be proud of it?

  • Comment number 7.

    The MPC have become impotent. They should have used the "first in 300 years" drop to 0.5% for shock treatment, and put rates back to 2% within 6 months.

    They have now done the equivalent of giving pain killers to a patient for too long... the patient becomes addicted. Our economy now seems incapable of having a rise above a 0.5% rate... and let's not forget we are talking about money being almost free (to the banks).

    The government should sack Mr King and the whole committee. They have continually failed to achieve their goals, and have now made themselves powerless. They have check-mated themselves.

    Just look at every "fan graph" the MPC have produced over the last 3 years. Stephanie should produce a sequence of them in a blog, to show how pathetic the MPC have been at prediciting 6 months ahead, let alone over the longer term.

  • Comment number 8.

    I don't understand why we are still labouring under Brown's 2% target for inflation. 2% is an historically unachievable target, so why isn't Osbourne re-targetting at, say, 3%?

  • Comment number 9.

    The wage inflation response to price inflation is not only inevitable but as the BBC web site records it is happening now. The only qualification to that is the position of the public sector and its 2 year pay freeze. Even here it is difficult to believe that the line will hold beyond the next 6 to 9 months and there will be public sector strikes as well as private sector industrial action. People look at the RPI as the real measure of inflation as well as the plethora of evidence in the shops and forecourts and both CPI and RPI have not yet recorded VAT rise. Whist workers may not react to a short bout of inflation this is not what is happening. Higher wage demands will become the norm very quickly and the MPC/Chancellor will panic on interest rates.

  • Comment number 10.

    Just heard the Labour "Shadow secretary to treasury" on Radio5. What is it about these people that make you feel sick just listening to them? Anyway, she is incompetent, as she was saying that the January figures will include the 20% VAT so are likely to rise further.

    Does she not know that the Jan 2011 inflation figures will have the 2.5% rise of VAT from 15%-17.5% dropping out. So the rise to 20% would not in itself add to the inflation figure ?

  • Comment number 11.

    Spot on Stephanie, if only the economists had realised the same thing the last time that interest rates were increased to curtail "increasing" house prices, which if anyone had taken the time to go outside they would have realised was actually the opposite of the case.
    Some inflation of prices obviously has the effect of being deflationary in the economy. In fact commodity inflation acts more quickly on demand than any lumbering interest rate rise could ever do.
    As a small but relevant aside, allow pension funds to invest in residential property and generate thousands of jobs.

  • Comment number 12.

    "Inflation: risks on both sides" is the title of Stephanie Flanders blog.

    It all sounds very familiar:

    Job losses.
    Cuts in public spending across the board.
    Higher VAT and fuel duty that affect the lowest/medium paid workers who are often front-line workers working shifts. These workers rely on their car to get to work and home safely, and on time when public transport is either unavailable, unsafe or unreliable too.

    I accept that interest rates have been held artificially low for too long. The cost of borrowing, however, has not truly reflected the BoE rate - all it has achieved is to depress savings. With fewer savings = little 'real' capital/cash - then banks had to borrow from each other - QED.

    Historically, when interest rates are low - bond prices inflate and overheat with investors.

    However, back to inflation. There is no wage inflation in the UK - but from my feeble memory - inflation and interest rates hikes occurred under the last Conservative government - as did record highs of negative equity and/or home repossessions. Yes, Labour did allow an over heating of property speculation and first time buyers trying to buy their first home - and many did.

    But the financial global banking crash has left these people with homes they can't sell because banks are not lending mortgages for those who want to buy?

    It's a complicated and secretive industry. What is clear is that those who are cash rich are collaborating and scooping up properties at knock-down prices and renting them back to those who aspired to owning their own home at 'the wrong time'.

  • Comment number 13.

    re: #2

    Index linkling pensions to CPI makes broad sense as pensioners are much less likely to be affected by housing cost changes.

    With rising inflation and increased VAT to come in to these figures, isn't it an appropriate time to revisit the plan to raise EE's NIC's? Increased inflation and taxes will obviously impact on real income.

  • Comment number 14.

    Hear that? It's the sound of chickens coming home to roost. Inflation was always going to be the risk of ultra-low interest rates, whether by over-stimulating demand or by increasing the price of imported materials (including everything made from oil). In an expanding economy there would be room to raise interest rates to dampen demand and pressure on wage rises a little and reduce the price of imports. However as it stands the Tories have perpetuated the L-shaped recession (a further second dip remains to be seen), the manufacturing sector (decimated all those years ago by Thatcher) is still too small to pull up the whole country and the service sector is more interested in paying itself a fortune instead of using the money to stimulate the economy.

    In short, an easy route to Stagflation, as long as the government continues to pursue its blinkered headlong rush to austerity (well that worked in Ireland didn't it).

  • Comment number 15.

    To those who dare to suggest that the UK has not gone the way of Japan ,for the reason that the Japanese are compulsive savers, please give yourself an almighty thump in the teeth from me.

    These inflation figures are meaningless.

  • Comment number 16.

    Stephanie, I loved the coment "no one is happy that inflation has remained so far above target for so long - least of all the Bank of England". It reminds me of the Generals in World War 1 convinced one more dash over the top will see the breakthrough.

    Out here in the real world people are really hurting. Food and travel costs are rising weekly. It won't be long before we GBP 6 a gallon of petrol.

    The MPC seems to have no plan B.

    It can surely only be days before Mervyn King is reduced to putting underwear on his head and pencils up his nose and answering questions with "wibble".

  • Comment number 17.

    There are no inflation problems in Germany, France, US so can anyone explain why we have one?

  • Comment number 18.

    it is an absolute lie that 'The Fools of Threadneedle Street' are faced with a dilemma! There is no dilemma. Or rather the only dilemma they face is one that further challenges their integrity. Put up interest rates to counter inflation - that is the only mechanism they have and they must use it. They are a catastrophically incompetent group of people. They have single handedly created the credit boom that led inevitably to the crash. They are responsible. They were told years ago that they were mangling the economy's interest rates incompetently and they ignore the sound advice.

    Today we will hear bankers arguing that rates cannot rise - they are wrong. All these people are doing is further feathering their own nests at the expense of the poor. If the cost of capital had been far higher during the last noughties they would not have created the credit bubble. This is the massive and unforgivable incompetence at the heart of policy. It is not quite obvious that those in change have not a shred of integrity or they would have resigned long ago - we must sack them.

    The banking pundits now say that the capital requirements should have been higher fro the destroyers of the universe in the noughties - this is precisely the same as my argument at the time that rates were far too low. I have been yet again been vindicated b=y the very fools that now thing they can continue to get away with sucking the lifeblood out of the country and converting it top private profit. I believe that my rage with these people and the system is fully justified and fully vindicated as is the position I held during the whole of the noughties.

    Fire the Fools NOW! Before they do even more damage.

  • Comment number 19.

    Interest rates must go up, if the banks and the government want investment then there has to be an incentive to investment. Paying savings interest rates of zero , to a high of about 3% isn't going to entice anyone to take their cash out of the mattress. If businesses want to borrow, then they must pay the people who give them the money a reasonable return. Investors , like banks are in business to make profits,not to support failing companies who may or may not recover. It may be simplistic but if a business cannot budget for survival with what it earns, then it is not a good investment and like a failing bank should be allowed to go .

  • Comment number 20.

    5. At 11:28am on 18 Jan 2011, TheNewPonzi wrote:

    This has nothing to do with the banks as they are still able to off load toxic debts to the goverment in the scheme. The fact is the ones that were in danger have done so. This is all to do with the BoE MPC playing politics and acting outside their remit. They are targeted with maintaining inflation rates at below 2%, something they have not been able to achieve for some time and it may be said that they have not even tried. Whats more they have not even offered plausible reasoning behind their decisions. They all are loosing any credibility they had and need to step up to the plate soon if they are going to salvage this position and their reputations.

  • Comment number 21.

    TheNewPonzi has a point. Not only the banks but also many private individuals are reliant on low interest rates to maintain their levels of debt. BTL house owners are already struggling to cover their interest payments in the face of falling property prices, and of course the banks are exposed to these in turn. That wouldn't be so much of a problem of course, if the banks had been forced to rebuild their liquidity and guard against these bad debts, but they had other priorities in mind for the money, didn't they? And nice of the government to roll over and let them.

    At some stage the government are going to have to start taking some responsibility themselves for their decision to slash and burn the state rather than address the root cause of the problems, and not just glibly blaming Labour for the actions of the banks.

  • Comment number 22.

    Do not forget RPI. We should all be talking about this measure. Remember cpi is just an index that the Government are now using to pretend the rate is lower. Why not invent an index that is currently at 0% - a few people would then be overjoyed?

    Reality is the truth.

  • Comment number 23.

    All this user's posts have been removed.Why?

  • Comment number 24.

    Did anyone think that with a generation of chavs born to PC schoolteachers and working mums, brought up on cheap ecstasy, alcopop and reality tv, that the UK would ever amount to anything at all?


  • Comment number 25.

    Surely this is the inevitable consequence of the devaluation of sterling from $2 to $1.60 and the Euro from 1.5 to 1.2 now (and which was actually even greater 1 year ago)? It typically takes 1 to 2 years for the full effect of a devaluation to work its way through. In the respect of such "imported inflation" the only effect the BOE can have in raising interest rates is for the £ to increase in value. A double edged sword since it also serves to make our exports more expensive.

    Raising interest rates works if an economy is overheating and the inflation is essentially "home grown" eg wage and property inflation. That's clearly not the case at the moment and raising interest rates will have minimal impact on inflation and just slow the recovery further.

  • Comment number 26.

    Yes I think you're correct to say that higher UK inflation will be offset to some extent by falling demand later as consumer spending is squeezed. I presume that is the BoE prediction. Nothing wrong with optimism. I'm interested to see the global effects of rising food and energy costs driven by expansion in Asia. I believe it will continue for some time and price rises will be well beyond expectations, even in the short term and without assistance from 'bad weather'. Mostly due to effectively finite natural resources and the failure to respond adequately to global challenges such as the efficient utilisation of limited arable land and water. Changing interest rates won't affect that.

  • Comment number 27.

    If raising interest rates affects inflation by reducing the available money supply, then inflation, leading to higher prices is in fact self regulating and at present any raise in interest rates would be the act of a madman.

  • Comment number 28.

    Kaybraes, your argument resonates with me as it's one that was posed when Rolls-Royce aero engines ran out of money in 1971.

    Look at them now.

    Because a company runs out of working capital does not make them fundamentally non-viable. many companies suffer from occasional blips in the cashflow, not least when some of their customers go under. Not all are able to put money under the corporate mattress to cope with all eventualities, so they rely on banks being able to lend to get them through hard times. Rolls was lucky, the government reluctantly coughed up, and saw a good return on its investment when it was refloated. How many businesses would you like to go bust to hang on to your dogma?

  • Comment number 29.

    24. At 12:04pm on 18 Jan 2011, Oblivion wrote:
    Did anyone think that with a generation of chavs born to PC schoolteachers and working mums, brought up on cheap ecstasy, alcopop and reality tv, that the UK would ever amount to anything at all?
    _________________________________________________________________________

    I think you mistook the BBC website for the Daily Mail.

  • Comment number 30.

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

  • Comment number 31.

    1. At 11:12am on 18 Jan 2011, Chris London wrote:
    And the BoE are not even fiddling while we burn!!!!!

    When will they raise interest rates, too late possibly, for the train has already left the station. And don't mention the price of the ticket.......

    ============================

    As the majority of the increase in inflation is ascribed to food and fuel both of which are globally traded commodities - ramping up interest rates to supress demand would not in all probability result in the reduction in inflation that it is supposed to do. UK demand is insufficient to make enough of a difference in this price.
    The fuel price stabiliser being mulled over for the budget may help but inflation will remain high for some time to come - and the Governor will continue writing letters to the chancellor all year.

    Consumers will have to hope that the market mechanism will provide more supply this year of these commodities ( in response to the high prices) which will reduce the prices next year.

  • Comment number 32.

    Baudolini is correct. This is supply side driven inflation, not demand driven (though continuing inflation will also drive up wage demands as Stephanie noted). Therefore raising interest rates would be a double edged sword - it would enable us to import more cheaply (reducing fuel prices) however it would aldo damage exports by raising the price of British goods abroad, stifling recovery.

    By choosing to cut rather than build this government has left us in a cleft stick, with no weapons to fight inflation that won't bring their own problems. A growing economy could be managed, one bumping along the bottom will be a victim with little ability to stop inflation rising to double figures.

  • Comment number 33.

    Also note that today Robert Peston interviewed a banker and he said that in his opinion the cause of the credit bubble was too cheap capital - that is in his terms that the capital adequacy requirement of the banks were far too lax. This is identical to saying the interest rates were too low fro the noughties.

    The same problem exists today - I will not reiterate the detail of the many arguments I have presented over this matter in the past years, but save to say that rates must rise to rational values and The Fools of Threadneedle Street (or rather a new bunch!) must demonstrate integrity and professionalism and indeed respond to the market.

    Note: 'respond to the market' (above) means that the Fools have lost control of the cost /price of money in a disastrous and 300 odd year catastrophe. Market 'base rates' are about 3% (above saving rate and below borrowing rates) whereas the special exception is the banks who borrow at near zero - this is robbing the British people and MUST stop!

  • Comment number 34.

    Steph:

    "No-one is happy that inflation has remained so far above target, for so long - least of all the Bank of England."

    Hilarious.

  • Comment number 35.

    #27. IanB wrote:

    "If raising interest rates affects inflation by reducing the available money supply, then inflation, leading to higher prices is in fact self regulating and at present any raise in interest rates would be the act of a madman."

    Your arguement might have same validity IF money was currently rationally priced - BUT it isn't!!!!!

  • Comment number 36.

    17. At 11:54am on 18 Jan 2011, gpstew wrote:
    There are no inflation problems in Germany, France, US so can anyone explain why we have one?
    =========================================================================
    All to do with economies and consumption of products IE Imports V's Home grown. We in the UK now import too much and produce too little. The old adage "Buy British" really would make the difference.

    A simple example is look at cars in Germany and France. Most buy their own brands rather than imports the same can be said of the US although this has changed in resent years to some extent.

  • Comment number 37.

    Raising rates now wouldn't make sense. If you begin to see good wage growth then that would make more sense as people would be better placed to deal with the increases to housing costs.

  • Comment number 38.

    @Oblivion

    Do try to stay on topic! This is an economics blog, not a space for generalised ranting about the decline of Britain.

  • Comment number 39.

    #21. odo56 wrote:

    "TheNewPonzi has a point. Not only the banks but also many private individuals are reliant on low interest rates to maintain their levels of debt."

    You are arguing that the criminal lunacy of the past justifies destroying the country for another generation - absolutely crazy! Debt is the problem - it MUST be unwound as quickly as possible for the country to regain any economic momentum.

  • Comment number 40.

    #32. Dodo56 wrote:

    "A growing economy could be managed, one bumping along the bottom will be a victim with little ability to stop inflation rising to double figures."

    The reason we are bumping along the bottom is that we haven't unwound the debt mountain.

  • Comment number 41.

    To those calling for higher interest rates - I don't see why you think it will work? (But would like to hear decent answers).

    Inflation currently is all about world oil, gas and food prices. Isn't it just living in the past to think the MPC (or anyone else) has any effect on (that type of) inflation? Would raising rates really mean inflation coming down? Sure, it *might* mean a small adjustment in the exchange rate, which *might* bring costs of imports down. But would the damage to exports be worth it? And the exchange rate is likely to be subject to bigger factors (i.e. external shocks) than a small raise in interest rates.

    Bear in mind the US is *not* going to raise rates for a while, and indeed is embarking on QE2, so financial institutions will still be able to get cheap money - so if you believe worldwide QE has caused commodity price inflation, a UK rate rise will have negligible effect, given the relative size of the US/UK, and the size of QE2 pumping out cheap money.

    The truth is that the real price of food has been falling for decades, and from now on is going to rise - that is, as a percentage of UK household income/expenditure, food has fallen massively, and we'll have to get used to it taking a bigger share again. The same is likely to be true of fuel - rising demand, falling supply (of easily available fuel), growing fears of climate change (real fears, whatever your view of their merit).

    The greater truth is that over the past 15 years the average UK household got used to living beyond its means ("easy credit") - I'm thinking more credit card and unsecured borrowing rather than mortgages. Not only are we now going to have to get used to living within our means - that would be quite a shock. But it's *far* worse - we're going to have to get used to re-paying the years of debt. Sadly, that's going to have a major impact on all of us, not just on those who overborrowed (I've little time for "It's the banks' fault for over-lending". No, it's *your* fault for borrowing what *you* couldn't afford. Didn't understand you couldn't afford it? If you don't understand it, don't do it. Didn't think you'd lose your job? You've got Gordon Brown's disease - when times are good, save, don't borrow).

    It's going to affect us all because those who borrowed to buy a TV/sofa/new kitchen/new clothes, or borrowed to eat at restaurants they couldn't really afford, were spending their credit, and spreading it around, causing "growth" in the economy. It wasn't growth at all, just borrowing from the future. Now it's payback time.

  • Comment number 42.

    By the way as the Fools are using interest rates to control inflation - and it has a year to eighteen months lag - then the Fools failed to put up interets rates a year to eighteen months ago. Sack them!

  • Comment number 43.

    21. At 12:01pm on 18 Jan 2011, Dodo56 wrote:
    TheNewPonzi has a point. Not only the banks but also many private individuals are reliant on low interest rates to maintain their levels of debt.
    =========================================================================
    This is surely a wake up call, people should not be reliant on debt they should be living within their means rather than borrowing on the never never for unlike the fairy tales there is not going to be a happy ever after.

    We will surely soon see a lot of debt come home to roost and unfortunately the vast majority will only have their selves to blame. However I am sure the banks will get a roasting for lending them the money in the first place.

  • Comment number 44.

    Given that the inflationary causes are outside of individual control, surely any rise in interest rates, will only cause a reduction in consumer spending, thus threatening the already fragile recovery?

    I have the awful feeling that we're up the creek without a paddle here.

  • Comment number 45.

    35. At 12:19pm on 18 Jan 2011, John_from_Hendon wrote:
    #27. IanB wrote:
    Your arguement might have same validity IF money was currently rationally priced - BUT it isn't!!!!!
    =========================================================================
    Here, here, money is too cheap at present and has been for more than a couple of decades now.....

  • Comment number 46.

    Oh, and a while back i suggested that inflation would rise substantially.

    If the Government weren't looking to do this, why raise VAT and also raise EE NIC's over a slow portion of the year? The fuel duty stop loss disappeared too. Anyone would think that the Government want to fuel inflation - these are definately inflationary measures. But why?

    The current flavour of the week is spending cuts. Some nice smoke and mirrors to avoid discussing quite how the Government expect to repay the massive debt the country has.

    Isn't the current situation a perfect point to inflate away debt?

  • Comment number 47.

    The inflation is a resultant of growing global economic realities as nations, such as China, flex their spending muscles to purchase raw materials (inc food and energy). Also, substitution effects (economics) note Chinese tastes (food) develop from subsistence to more 'affluent' foods such as meat. The reality is that the global market is now reflecting over-populations and inequalities that have been 'hidden' from the UK and other 'developed nations' through their historic economic positions that have been erroded by Western credit dependency and Chinese/Indian economic resurgence. It is 'smelling the coffee' time for the UK - welcome to the 21st Century! Conventional economic policies of raising interest rates will merely depress domestic economic growth.

  • Comment number 48.

    36. At 12:19pm on 18 Jan 2011, you wrote:
    17. At 11:54am on 18 Jan 2011, gpstew wrote:
    There are no inflation problems in Germany, France, US so can anyone explain why we have one?
    =========================================================================
    All to do with economies and consumption of products IE Imports V's Home grown. We in the UK now import too much and produce too little. The old adage "Buy British" really would make the difference.

    A simple example is look at cars in Germany and France. Most buy their own brands rather than imports the same can be said of the US although this has changed in resent years to some extent

    And the use of credit is also completely different in these countries. The UK has a history in resent years of living off credit while Germany, France and even the US now do not use credit to the same extent. We lived above our means and are now suffering for that....

  • Comment number 49.

    As I understand it Stephanie your views have gone as follows.

    Firstly.There is no evidence of inflationary pressure anywhere so there is no need to do anything.

    Secondly. As the evidence for inflation has been building for so long it is no longer possible to ignore it and deny there is a problem. However we should still do nothing.

  • Comment number 50.

    John_from_Hendon you seem to have missed my point. Nobody has suggested we can maintain a deficit forever, the question has always been HOW and WHEN to best reduce it.

    If you as an individual have debts when would you think was the best time to reduce those, when you are in good financial health or when you are watching the pennies in between jobs? This country is very much "between jobs" at the moment and needs to bolster its financial health before it can make meaningful progress towards paying off its debts. As I'm sure you're aware, Labour's last budget was designed to continue to promote growth with modest cutting to restore the structural deficit. The current budget says "to hell with growth", and as long as we continue down that dead end path we will continue to have no weapons to fight inflation.

  • Comment number 51.

    Another aspect of the government’s deficit reduction strategy that will affect inflation is the increase in tuition fees. They will put pressure on the CPI over the coming years until it is fully implemented. As we approach the time when all year groups in universities are paying higher fees then total spending on education will be increasing year on year. Spending on Independent schools fees may also rise in response to higher utility bills. At the moment the weight for spending on education in the CPI is 1.9 parts per 100 and this weight is about half that allocated to tobacco and alcohol. So a combination of higher university and private school fees and the resulting increase in household spending on education could lead to an increase in the weight for spending on education in the CPI. From 2014 onwards therefore further increases in tuition fees will have an impact on the CPI long after the effect of the rise in VAT has worked its way out of the calculation.

  • Comment number 52.

    The £GBP is getting stronger, so imports will be cheaper. That will help to keep inflation lower even if commodity and food prices do rise. No-one knows how this will play out, so we'll just have to wait and see.

  • Comment number 53.

    Raise interest rates to 5% and it will make no difference to inflation.

    Inflation is rising because of non UK commodity prices , oil , wheat etc , not from wages , the average wage settlement is approx 1%...

    We need to keep the £ low and rebuild our exporting businesses and that includes the "Invisibles" from the finance centre. Pay down our debts as fast as we can, is far more important and we can't do that with 3 million on the dole...

  • Comment number 54.

    45. At 12:29pm on 18 Jan 2011, Chris London wrote:
    35. At 12:19pm on 18 Jan 2011, John_from_Hendon wrote:
    #27. IanB wrote:
    Your arguement might have same validity IF money was currently rationally priced - BUT it isn't!!!!!
    =========================================================================
    Here, here, money is too cheap at present and has been for more than a couple of decades now.....

    _________________________________________________________________________

    And there was no demand for cheap money. It's all the bankers fault, it's the BoE's fault, it's the governments fault.

    Either of you willing to accept that there was also demand for this?

  • Comment number 55.

    I agree with the previous comments who distinguish between external/supply side inflation and internal/domestic/demand-led inflation. While interest rates are historically the weapon against the latter, they will achieve absolutely nothing against the former.
    I believe that most if not all of the current inflationary pressures are coming from external supply into our economy and are a continuing consequence of the relative devaluation of our currency, investor speculation and increased demand from the emerging economies in China etc. By contrast, none of these inflationary pressures are coming from increased demand (housing, luxury goods, cars etc) in and an overheating of our domestic economy.
    Further, I see little in the way of wage inflation either and indeed recently had to agree to a 30% wage cut just so as not to be made redundant! The exception of course is in banking which, given that they would all now be closed, out of business and on the dole without the taxpayers' involuntary investment, seems to be both ironic in extreme and totally unacceptable.
    We do indeed continue to face catastophic economic circumstances with austerity seemingly the only half-chance we have, but if the interest rates rise then you will immediately turn off any remaining consumer spending leading to massive mortgage default, redundancies, massive numbers of new benefits & housing claims and probably collapse.
    Tread carefully policy makers!

  • Comment number 56.

    There is no dilema
    Using interest rates to control inflation is just the wrong thing to do period.

    a) It makes it impossible for business to plan investment when interest rates can go up steeply.
    b) It reduces demand only by taking money from a small number of usually pretty poor people, rather than taking money from the very rich who are the ones who can afford to spend
    c) It has no real effect on demand for basic goods - food, drink (water, fruit juice, milk), electric, gas, petrol/diesel, rent - those goods people have no choice but to buy. These are the product which are going up by 40-50% a year. But as a human I need a certain amount of these basics - even when I cut back as much as possible.
    d) Increasing interest rates has the effect of providing even more spending power to the rich who have plenty of money already - so is at least partly self defeating
    e) Increasing interest rates raises the value of the currency so making exports harder and imports more competative thus reducing the value of your countries real economy
    f) Increasing interest rates increases already obscene bank profits at the expense of business and individuals.

    Better to use tax to control inflation. Add 1% to the income tax rate, everyone loses some money, the government closes the budget deficit, demand in the economy is reduced, sterling is unaffected...

  • Comment number 57.

    By the way I disagree with Peston when he asserts debt was too cheap in the past. Debt that is too cheap fuels demand side inflation, and if you recall we had a decade of low inflation and steady growth.

    The problem was not cheap lending, it was reckless unsecured lending.

  • Comment number 58.

    @48
    All to do with economies and consumption of products IE Imports V's Home grown. We in the UK now import too much and produce too little. The old adage "Buy British" really would make the difference.

    True, very true, and Buy British should start with government and government agencies. If my local council had bought LDV instead of Merc vans LDV would be a thriving profitable company with a cracking range of new vans with the latest technological innovations paid for from the profits it had made. Instead I have to pay unemployed LDV workers benefit while Merc are busy capitalising on the van market not just here but all over the world and the Germans are paying less tax because they have a greater % of the workforce working instead of claiming benefit.

    There are numberous other examples - nhs computer system, police cars, army tanks, airforce planes, rn ships, tax computer system............

  • Comment number 59.

    Chris London, absolutely true, French buy French etc etc...buy British, well I suppose that would help if we had a British car manufacturer, but in many respects we are lax. WE have thousands of acres unused, when we could grow foods that we import, timber we import and meat.
    If you can bring to me a member of staff that is asking for a wage rise, I will admit I am wrong, but will also claim to have seen a fool ! Wage inflation was touted by the RBS as a reason for interest rates to go up just before they fell like a stone and the senior staff repositioned themselves as government employees.
    Dodo is partially correct about the errors of cutting, but its an action which will allow us to find out much about ourselves, one step back two forward, it also suppresses wage claims.

  • Comment number 60.

    The B of E states that higher interest rates have the following effects
    1. more saving less borrowing
    but aren’t the government constantly berating the banks for not lending?
    2. cash flow
    Savers have more borrowers less these will largely cancel out
    3. Asset Prices such as shares and property will fall
    Is house price deflation good? Not for home owners and not for prospective purchasers as high interest rates offset the saving they may make, share price falls are not good for pension schemes or anyone owning shares
    4 Exchange rates
    Higher interest rates cause a higher pound making imports cheaper exports dearer. Hence we spend more on imports, so good for the Chinese then, not so good for the British businesses and farmers
    So will higher interest rates actually reduce inflation?
    In the past it was a crude tool but it has worked, but this is a global economy, will a small reduction in British demand for oil reduce its international price of course not, and if lots of countries act together to reduce demand opec will reduce supply.
    Remember Australia has interest rates eight times higher than ours and their petrol prices went up 15% in 3 months.
    Inflation is caused by global factors, sorry but we can’t influence it we just have to learn to live with it because we will destroy our economy whilst we learn that the world has changed

  • Comment number 61.

    As a retired engineer, I have never been able to grasp the logic of the following.
    If inflation rises; the BoE should put up interest rates.
    Surely - that simply INCREASES inflation..? Or are mortgage payments somehow 'not counted' in inflation calculations..?

  • Comment number 62.

    It was quite evident at the start of the crisis that we needed much more and sooner quantitative easing rather than silly interest rates (say 2% higher than now). We also needed much less government spending.

    Now is a different day. We have once again distorted the credit market with the low interest rates. This means we are going to need to unwind a second credit crisis.

    I think we are going to have to pay the price through higher inflation stagflating away more structural idiocy.

    There is no such thing as a free lunch, somebody will have to pay for the property/mortgage bubble. The choices are negative equity, the national debt, bankrupt banks, or robbed savers. If it is not going to be through negative equity and bankrupt banks then it is going to be savers and tax payers. This is hardly the fair choice, but might be for the best.

  • Comment number 63.

    "56. At 12:47pm on 18 Jan 2011, anotherfakename wrote:
    use tax to control inflation....... demand in the economy is reduced...."

    I can see a flaw in your argument, can you guess what it is?

  • Comment number 64.

    According to the fool for the E&Y ITEM club - this is nothing to worry about!

    Has anyone noticed that all the items going up are essentials - whilst all the items going down are luxury / non-essentials?

    If this isn't a reflection on the true financial situation of the people - then I don't know what is. I know it, you know it and clearly the speculators know it.

    We're all going to have to pay a 'speculator tax' on our daily loaf of bread - how does that feel sucker Britain?

    ...however unlike a tax there is no chance the profit will be re-invested in the UK.

  • Comment number 65.

    Raising interest rates will do absolutely nothing to curb imported inflation. There is no evidence of a wage price spiral starting. If anything, the imported inflation is further dampening demand.

    I do suspect an agenda. A mild bout of inflation helps the indebted. The real value of debts are reduced. Such an outcome would remove significant risks from the banking industry as the real level of consumer debt declined.

    It would also suit the Government, who would see the real value of the national debt decline. However, if the bond markets even suspect that this is happening, then all hell will break loose and, as a country, our debt will become seriously more expensive to service - as it is in Ireland, Portugal and Greece.

    The MPC have my sympathies. They are trying to maintain a balance between two powerful and opposite forces: inflation and deflation - rather like balancing on a knife edge. If we deviate too far, in either direction, then the risk is that we plunge into a serious bout of either inflation or deflation. Of the two, deflation is easily the most dangerous. There are solutions to inflation, though the medicine is not pleasant. Deflation is a much more intractable problem - witness Japan for the last 20 years.

    When inflation is imported, for example, through higher commodity prices; then this is a one off hit. We are all just that little bit poorer. Interest rates have no bearing on that process. Should domestic inflation begin to increase, then, and only then, should interest rates be raised.

    As a final note, interest rate hawks have recently been banging on about inflation expectations increasing. However, as long as those expectations are not translated into a surge in wage demands, then raising interest rates would be pointless, even counter productive. The current state of the labour market is not conducive to employees successfully demanding higher wages. Currently, the imperative for most employees is to keep their job, not risk losing it. Similarly, those seeking jobs cannot be aggressive in their salary expectations - just getting a job is the objective.

    Steady as she goes, Mervyn, and ignore those hawks.

  • Comment number 66.

    54. At 12:45pm on 18 Jan 2011, Jack_Dwakins wrote:
    And there was no demand for cheap money. It's all the bankers fault, it's the BoE's fault, it's the governments fault.

    Either of you willing to accept that there was also demand for this?
    =========================================================================
    I think if you read my other posts you would see that I do not support the thought that it is all the banks fault. In fact I feel that we the public need to shoulder our share of the blame. Yes the banks were lax in the way they lent but no one was forced to take the money. Was there a demand for "cheap" money, YES and in fact ironically there still is for the vast majority have still not learnt their lesson.

  • Comment number 67.

    Stephanie
    Pedants corner...you have in your update
    "Like Mr Henderson, their focus is on what these high inflation figures might mean for future wages and inflation expectations..."
    I think you initially quoted a Mr Ward from Henderson Global Investors.
    The Hendersons will all be there...of course!

    Haven't some argued that a little inflation is no bad thing - then again how sharp a tool are interest rates in calming a global commodities bubble? We should be careful what we wish for, as if we get as far as debt deflation the pips really will squeak.

  • Comment number 68.

    Update: reading the comments from others is positive - so much understanding - a pity that this was lacking somewhat in govt per se. I believe in evolution and maybe we are nearing the end of a long economic cycle,the end of the British Empire. It will merely mean the replacement of the current hedgmony based on consumerism and a gradual shift, after a period of turmoil (social 'soul' searching) to another form of hedgmony that allows individuals to form social norms that do not require the need of self esteems to be based on (e.g. conspicuous consumption - Verblen) say what one does for a living/wears or the plasma tv. Change is frightening as no-one (even govts who, yet, for social stability have to pretend they know) knows how to resolve structual economic change. Time will tell...

  • Comment number 69.

    This is not really about economics, it’s about the destruction of peoples wages.

    BOE base rate Jan 2009: 1.5%
    BOE base rate March 2009: 0.5%
    BOE commences QE March 2009

    Since these actions were taken, the following has occurred:
    Average mortgage interest rate: 5.1% (3yr fixed)
    Average credit card rate: 19%

    Retail price index (all items) RP02:
    Jan 2009 210.1
    Dec 2010 228.4
    Price inflation = + 8.7% (which does not yet take account of the v.a.t. rise.)

    Average weekly earnings private sector (not seasonally adjusted):
    Jan 2009 Average weekly earnings = £445
    Oct 2010 Average weekly earnings = £435 (provisional)
    Increase = – 2.3%

    Average weekly earnings public sector (not seasonally adjusted):
    Jan 2009 Average weekly earnings = £441
    Oct 2010 Average weekly earnings = £465 (provisional)
    Increase = + 5.4%

    Average weekly earnings figures for Nov & Dec are not yet available.


    The low BOE base rate has no effect on the interest rate for either mortgages or credit cards. It does however allow banks to borrow cheap, and thereby increases their profit margins. The BOE base rate is there to repair bank balance sheets, and guess who’s repairing them, you’ve got it folks, me and you.

    Anyone working and encumbered with a loan is being consummately slaughtered.

    And that’s why I post the following link:
    http://www.positivemoney.org.uk/

  • Comment number 70.

    What we have to always remember is "why on earth are the bank's rate set at 0.5%". They have not been under 2% since the BofE was formed over 300 years ago. We have had several world wars, depressions and bad recessions over this time.

    So what is so different this time? Well basically our way of life has crashed, except that it hasn't, because by making money almost free we are injecting one large dose of life into the very sick patient.

    The ONLY way that this emergency treatment of low interest rates can be justified is if it stimulates such a revival of economic activity that the growth pays back the debt burden. If anyone thinks this is going to happen, I'd love to hear their rational explanation.

    Unless we find a way of creating cheap energy our way of life is over. Currently most new energy forms need way too much energy to get the energy created. So we need to start again. Allow the zombie banks to crash, allow the wiping out of much of the personal wealth of the top few percent that has only been generated as they have been able to exploit cheap energy and cheap labour. Start society again based on principles of sustainable living.


  • Comment number 71.

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

  • Comment number 72.

    "66. At 1:10pm on 18 Jan 2011, Chris London wrote:
    I do not support the thought that it is all the banks fault. In fact I feel that we the public need to shoulder our share of the blame. Yes the banks were lax in the way they lent but no one was forced to take the money."

    Like any crash there is no single cause but rather a chain of events. Yes, people were greedy and took what was offered in the expectation the bubble could grow forever. Yes, the government were complacent in allowing the banks to do what they liked. However both those parties can be mitigated, from the perspective that the public do not by and large have in-depth economic insights and if offered handfuls of money will generally take it. The government, lulled into a false sense of security by the banks and the actions of the rerst of the world, would have been unusual to have seen through the mess the banks were building.

    There remains a central player in this, massive companies who employ all manner of financial experts and who are supposed to be trustworthy with the money they handle. People who should lend responsibly to businesses who can afford to repy the loans and have adequate assets in place to provide scurity. people who don't poach anyone from the FSA who might be bright enough to see through their schemes.

    We have a situation akin to a street mugging here and people seem to be suggesting that the victim is to blame for having money in his pocket, as well as the police who were out watching supposedly more dangerous streets.

    No, the banks aren't 100% responsible for this mess. Let's agree on 95% shall we?

  • Comment number 73.

    Please could someone who is advocating a rise in interest rates to curb inflation explain something to me...
    The items that have risen most in the past year include Heating Oil (48%), Petrol and Diesel (12.9%), Cooking oil (11%), Fish (9%), and Train Travel (7.4%). Higher interest rates are supposed to curb inflation by cutting demand, thereby reducing prices. But how is an increase in domestic interest rates going to affect the prices of global commodities and world fuel prices?
    What about the increases in fuel duty and VAT? That will add more to inflation without question. No amount of increase in interest rates will cause a drop in fuel prices or commodities.
    People need to eat and need to travel. In the current climate, raising interest rates will NOT lead to a fall in inflation, but will have a devastating impact on growth.

  • Comment number 74.

    I wonder if companies now realise that demand is as low as it's going to go and that a price rise will more than compensate for lost volume. and it's likely that all competitors will follow suit and increase prices, so there isn't the same commercial risk to price rises relative to market share as there is during good times.
    My view is that companies in the retail and service sector will now go full steam ahead with price rises in order to give themselves scope for discounting in the future - and they will enjoy the profits in the meantime.
    Any cursory glance at how Tesco are pricing food will make you realise that "every little (price rise) helps (the Tesco P&L)"

    I think inflation will soar this year, but fall back massively next year. In the meantime, there will have been a fundamental improvement in retailer profitability, a decline in volumes, and an impoverishment of consumers.

    On the plus side, within the next 12 or 18 months our banks will have sorted out their capital adequacy via suppressed lending and massive margin growth during 2011, so during the 2nd half of 2012 will embark on a huge credit splurge that will improve lending margins for consumers who will suddenly find a lot more credit available.

    So: a really painful 2011 and H1 2012, followed by a barnstorming 2nd half of 2012 and 2013 and 2014 leading to a feel good election victory for David Cameron who gloats about having sorted out the economy whilst having instigated the biggest - and least publicised - revolution in public service provision since the NHS was created. Happy days are just around the corner.

  • Comment number 75.

    First the UK gov was selling out on its people to the markets by imposing austerity for no other reason than to prevent speculators attacking GBP.

    Next the UK gov is ramping up VAT and other nonsense to make inflation look like a real thing, spreading rumours about base rate rises to tackle the fake inflation they created in the first place, in the hope that the very same speculators might give GBP another bump.

    It's classic. The UK gov are taking a royal shafting from a handful of banks and institutional investors, who work for banks that were bailed out by us.

    It's totally ridiculous. Write off the debt, ditch the USD, start again.

    Sometime you've just got to admit there's no point flogging a dead horse.

  • Comment number 76.

    Low inflation as we have experienced for the last 20 years or so could well become a thing of the past: we now have a massive new population in Asia driving demand and until there are supply side reforms to match the quantum leap in demand for food and base commodities there is nothing the Bank of England can do to drive inflationary pressures out of our economy.

    The only impact of higher interest rates will be to kill demand: the price rises will still be there, but almost no one will have any money with which to buy things - unless they are in rented housing.

    But if you're in rented housing your landlord will be going bust sometime soon, so you'll then be homeless like the rest of us who can no longer afford to service the loans on our houses.

  • Comment number 77.

    Moderated by gad ! I was only adding my tuppence worth (fourpence with inflation !) to an earlier post. I questioned the 'writing of the letter' methinks this parchment may be sacred !

  • Comment number 78.

    Inflation is the increase in the money supply over and above the value of the underlying economy.

    A price rise is not inflation.

    A rise in the price of one item means that less money is available to spend on another item (the amount of money remains the same) and so that items relative price must fall.

    If you create money but no underlying value then all prices rise
    If you consume underlying value without destroying the relative amount of money then all prices will rise.

    The solution to inflation is to either create more underlying value without creating any more money or reduce the money supply without reducing the underlying value.

    The traditional method of combating inflation is to raise interest rates and throw a load of workers on the dole, this has the effect of reducing the supply of available money.

    The banking system, by forcing them to raise their capital requirements, are effectively reducing the money supply, this has replaced the traditional method of reducing inflation.


  • Comment number 79.

    Is it definitely a case of the Bank of England having to hold its nerve. Inflation, be it RPI or CPI, is simply increasing because of the increase in the cost of goods etc due to tax rises, especially VAT. In addition, companies across the world are putting prices up not only to cover increased costs themselves, but also to try and increase their revenue. It is not the old increased demand theory of inflation but other factors. To increase the base rate would further squeeze households across the UK at a time when they should be encouraged to be out spending. Most households would have already been considering a year of austerity for 2011 - an interest rate rise would simply give credence to that decision.

  • Comment number 80.

    "Low inflation as we have experienced for the last 20 years or so could well become a thing of the past: we now have a massive new population in Asia driving demand and until there are supply side reforms to match the quantum leap in demand for food and base commodities there is nothing the Bank of England can do to drive inflationary pressures out of our economy."

    Another good truth - if we are right that the basic reason for the high inflation in energy, raw materials, food etc. is due to GLOBAL demand then even if we reduce demand in the UK to zero it will make not a dot of difference to the world costs - and therefore inflation.

  • Comment number 81.

    post 21 wrote
    At some stage the government are going to have to start taking some responsibility themselves for their decision to slash and burn the state rather than address the root cause of the problems, and not just glibly blaming Labour for the actions of the banks.
    ===========================================================================
    spot on my friend

    I don't understand why hmg don't completely nationalize the banking industry, and then fix the interest rate at 3% for ever.
    We get cheap loans, hmg makes a small profit, and everyone knows where they stand. In other words run the banks for the good of society as a whole rather than for the banking elite.

    Also and please forgive my ignorance, but why is there this fixation with continuous growth ?, its impossible to "keep" building a tower skywards because one day it will collapse under its own weight. Which is what the economy has just done.

    And why can't we as a country become as self sufficient "as possible" and pursue a policy of full employment, give everyone something to do, everyone earns a wage and contributes to society as a whole,
    I guess the reason is because the Tory's still believe in the neo-liberal ideology that has just collapsed under its own weight with the same fervour as a religious suicide bomber does when detonating his/her device and killing innocent people.

  • Comment number 82.

    That would be Mr Ward then, who works for Henderson (final para, first line).

  • Comment number 83.

    OK lets assume that the MPC does raise interest rates. What will happen?

    * Firms that are already saddled with rising raw material costs will face increased costs on any borrowing that they have.

    * Consumers with debt (lets face it most of us) will see our repayments rise, we will cut back on other expediture and demand will fall further.

    * Savers are currently getting diddly squat on their savings. Diddly squat plus a little bit more will not amount to much. Savers should be looking at the mark up the banks are putting on their money when it is lent to someone else.

    We are seeing cost push inflation and the Bank are right not to raise rates. It wont help.

  • Comment number 84.

    65. At 1:09pm on 18 Jan 2011, Sceptic wrote:
    'The MPC have my sympathies. They are trying to maintain a balance between two powerful and opposite forces: inflation and deflation'


    They don't have mine I'm afraid.
    Prices are inflating but the consequence is people's wages deflating.

  • Comment number 85.

    How kind of David Cameron to share the public concern re ever-increasing inflation. Low interest rates = inflation. It's a simple economic fact.
    Since low interest rates have not encouraged lending, why not raise them?
    Capitalisim survives on suply & demand, not on governmental, artificial messing about. Asked to name the single largest threat to growth this year, most would probably say
    - public spending cuts, and
    - the recent rise in VAT.
    Let's just summarize this statement and say: disposable income is going down the toilet.
    The OBR has made, I think, a major projection error: that consumers will continue to do their part (i.e. spend), but I believe that households will save, cut-back. Wouldn't you?
    And when savings + earnings cannot meet expenses, there will come a DEMAND FOR HIGHER WAGES.
    Advocates of a rise in interest rates are not "inflation nutters" (Thank goodness because this is the position that I hold.) A raise in interest rates is necessary to stop an upward drift in inflation.
    High inflation figures might spell FUTURE WAGE DEMANDS, but they may also spell- disquiet, strikes, rebellion.
    Bail-outs were a mistake that hurt ordinary taxpayers.
    VAT increase is a mistake that hurt ordinary consumers.
    Spending cuts are a mistake that hurt ordinary community needs and social programs.
    So, if all of these policies missed the mark, what would have hit a bull's eye?
    Any and all remedial action should have targetted the cause: investment banks too big to fail. There should have occurred not a demand for willing limitations on bonuses, not a puny little bank levy, not a slap on the wrist with a lot of knee-bending, but: a mechanism to make the culprits pay for what they had done.
    There should have occurred, in consultation with the EU, the imposition of a foreign exchange transaction tax. This should have occurred more immediately and not apologetically.
    Community banks should have been split from investment banks.
    A foreign exchange tax would barely touch community banks that don't usually engage in foreign trading.
    A foreign exchange tax would have hit the investment banks too big to fail because foreign transactions (usually off platforms faster than the speed of light) are the meat & potatoes of investment banks. Even a little foreign exchange tax (0.05%) would have generated billions, prevented the need for VAT increase, would have prevented the need for cuts to social programs, would have provided an audit trail so that nefarious financial products (like negative credit default swaps) could have been detected.
    It's not too late for the EU to enact such a tax. It's a matter of will -Will the Government continue to burden the people, or will the Government hold to account the investment banks too big to fail?

  • Comment number 86.

    The most dangerous price trend has been averted. We no longer need to fear being dragged into the pit of DEFLATION that has cursed Japan for so long.
    What is really interesting to me is the obvious dichotomy in policy making. The Osborne-Cameron-Clegg approach continues to emphasise the need to match the fall in Corporation and spending taxes by reducing public services and jobs. Their aim is to reduce spending in line with falling revenues as quickly as possible.
    The Bank of England, on the other hand, is more concerned about the impact of renewed economic stagnation on tax revenues. If consumer spending stays low and unemployment rises, they reason that the deficit will stay bad anyway (as it did in the 1980s) and not get better. So the Bank wants to keep interest rates well below inflation to penalise saving and encourage us all to go spending!
    For the moment, the stimulus measures put into effect in late October 2008 and in 2009 are still keeping up spending and money supply - which is why the UK economy grew quite strongly until last autumn. And our low exchange rate has stimulated exports of manufactures and maybe cut the number of foreign trips we make too. All of which is good for aggregate demand in an otherwise depressed economy that'll get even more depressed now the new government's measures are beginning to bite.
    So there's the difference. Will 'Merve the swerve' and his MPC pals keep us out of the Japanese style of deflation and stagnation? Or will the Government plan to cut the money supply prevail? What are the odds on those runners and riders?

  • Comment number 87.

    79. At 1:58pm on 18 Jan 2011, James_Cottrell wrote:
    'Is it definitely a case of the Bank of England having to hold its nerve. Inflation, be it RPI or CPI, is simply increasing because of the increase in the cost of goods etc due to tax rises, especially VAT'


    I beg to differ:
    Overall price level = (Amount of money x speed of transaction [usually but not always reasonably constant]) / (Supply of all available items to purchase)

    Oh how we earn an awful fate, when first we practice to inflate.

    The Bank of England has to hold its nerve?
    It is actively engaged in promoting damn inflation, and it knows the consequences of it.

  • Comment number 88.

    I wrote in post 69 what’s happened in the last two years.

    Now fast forward another few years of the same.
    What will be the final price for the keeping the banks going?

    20% inflation and wages flat?
    30% inflation and wages flat?
    40% inflation and wages flat?
    More?

  • Comment number 89.

    Inflation - that saviour of government mismanagement! Instead of fearing it, Governments embrace it, despite maintaining the opposite. It erodes the public debt, devalues the currency and so also disolves trade imbalances. It allows full throttle to their vaunting personal ambitions to constantly produce new (and expensive) 'initiatives.'
    I can remember beer at one shilling and sixpence a pint, whiskey at half a crown (two shillings and sixpence) and petrol at three shillings and sixpence a gallon.
    It may be history now but this tale has a moral in it, - don't trust money or governments as both are extremely flakey.....

  • Comment number 90.

    Inflation is a deliberate policy to erode the elephant in the room that is private debt and there is simply a lack of honesty in talking in these terms.

    Private debt levels restricts our growth because it is mainly in unproductive assets (housing) - its a classic misallocation of capital.
    Inflation and zero interest rates are being used to inflate away public and mainly private debt, automatically transferring wealth from the ordinary person to the wealthiest in our society while inflation destroys disposable income.
    It bails out mortgage holders and banks together while increasing everyone's costs as inflation destroys disposable income.

    Growth under current policy will be decimated and unemployment will rise to prevent wage inflation.
    2015 election will see a reflation for political purposes but the damage to ordinary people will have been done - they will be far less likely to get credit. It is not only immoral but criminal.

    The propaganda has been about public debt, but we have the lowest debt of the developed world's large economies (in %GDP terms). This allows right wing ideological policies to be implemented in the name of reducing the deficit (privatise everything, undeserving poor).

    This allows political bashing of the opposition. Fact is our total debt remains lower in %GDP terms now than France or Germany's at the START of the crisis - we started the crisis much with far lower debt (40% vs near 70% for our large neighbours).

    Our debt is long term and our debt requirements for the next 2 years is the lowest of any major economy, with only Australia and some Scandi countries better than us (and perhaps the dutch). Its lower than even Germany. when you see our borrowing requirement for the next 2 years, bear in mind its a proportion of $10trillion required globally.
    This is why we have maintained ultra low bond rates throughout the crisis (QE has kept them there).

    4 years of RPI around 6% is going to take a serious toll. Private sector wages in certain industries will rise (think the City, South East) aswell as for business leaders AND industries that provision services for the government who have always increased costs well over inflation each year and the govt will willingly pay (already happening with train operators, power generators etc).

    The talk of interest rate rises will push up sterling and hit our exports to a weakening euro.
    Lo/No Growth and unemployment coming up (a price worth paying), with right wing ideological policies implemented under its covers.

  • Comment number 91.

    We have a situation akin to a street mugging here and people seem to be suggesting that the victim is to blame for having money in his pocket, as well as the police who were out watching supposedly more dangerous streets.

    No, the banks aren't 100% responsible for this mess. Let's agree on 95% shall we?
    _________________________________________________________________________

    Not a similar analogy. I don't see how mugging bears any relevance.

    For example, my bank offered me a 30k overdraft and a credit card with a 15k limit. I said no. If some people were moronic enough to say yes to this, they are equally to blame for the current levels of indebtedness that needs to be dealt with.

    Someone who gets mugged is the innocent victim of a crime not someone who's complicit in it then cries crocodile tears when it goes wrong.

    The line of it's all the banks fault was straight out of New Labour; can't beleive how many people bought it (or perhaps found it convenient to go along with it) rather than looking a bit closer to home.

    Personally, I see blaming banks and bankers solely as trolling.

  • Comment number 92.

    One retailer told me that many outlets added the January VAT increase to there November and December prices so that they could claim 'No increase in VAT' in January.

  • Comment number 93.

    Maybe I'm being utterly naive here, but for the majority of people, the idea of raising interest rates while prices are rising and our wages aren't, seems, well, a little like pouring fire onto an already fiercely burning fire.
    By this, I mean my monthly budget is already as tight as it can possibly be. Inflation is not helping that, agreed. A current inability of my employer to give me a salary increase (for the past three years) doesn't help either.
    How, then, would increasing interest rates now help me or the economy as a whole? If the base rate goes up, then the high street will follow. It always has and probably always will, so my mortgage will go up. I will have less than nothing to spend. My on-going economy drive will have to become even tighter so I will spend less. How does that help?
    Please, somebody tell me. I'm very, very confused.

  • Comment number 94.

    I understood that this Government believes it was voted in on a policy of seeking to restore a sound economy - that's why they have said they need to raise taxes, cut benefits and cut public services. All of that effort is being undermined by their failure to tackle inflation.
    The Bank of England has stood by for the last year and watched inflation accelerate reducing the country's standard of living. For those of us who are retired and no longer have the capacity to increase our incomes this is a long term and premanent reduction in our ability to support ourselves.
    The Government clearly believes that it doesn't need the support of people on fixed incomes in the future - otherwise they would be tackling inflation more actively.

  • Comment number 95.

    Can somebody please educate me:
    1. Inflation is an indicator of cost of living based on the current prices of certain goods, correct?

    2. Overall spending by all of us on these goods is actually lower right now, correct?

    3. Unemployment is high, and getting higher, correct?

    If the above statements are correct, then how will raising interest rates improve our economy?

    Raising interest rates any further will reduce our spending power even more, so we buy even less goods. Won't that do the opposite of what we need right now?

  • Comment number 96.

    For those of us who are retired and no longer have the capacity to increase our incomes this is a long term and premanent reduction in our ability to support ourselves.

    _________________________________________________________________________

    This isn't true.

    DB pensions are index linked.

    State pension is now linked to earnings again.

    When you retire from a DC pension, you have several options to consider when choosing an annuity. If you took a more money now option without any index linking and inflation spikes, then that was the risk you took at retirement.

    There is a broader issue around DC benefit adequacy, but this isn't the driver behind that.

  • Comment number 97.

    Remantled’s head hurts

    78. At 1:55pm on 18 Jan 2011, BobRocket wrote:
    “The banking system, by forcing them to raise their capital requirements, are effectively reducing the money supply, this has replaced the traditional method of reducing inflation.”

    Are you saying that if the banks weren’t being forced to increase their capital requirements that the inflation we have would be greater and Dempster has demonstrated it as being 8.7%?
    As an earlier poster pointed out if the banks hoard the physical cash they can conjure even more (9 fold?) electronic numbers out of thin air and flood that back into the system. Wouldn’t this negate the initial inflation suppression?

  • Comment number 98.

    Inflation expectations, that's the one, and you are right to at least mention it. Where petrol tanker drivers go many others are sure to want to follow. Unless, of course, you're public sector then you'll be shown the door. My pension will now go up by CPI, am I supposed to cheer? Mind you last years' 'rise' was linked to RPI which in the qualifying month happened to be negative, so no increase at all! I believe that was a first for my occupational scheme.
    Regards, etc.

  • Comment number 99.


    The current problems were not caused by reckless saving. They were caused by reckless borrowing. The government's answer, and the MPC/BoE are compliant, is to encourage more borrowing to spend and to actively discourage saving by eroding the value of any savings.

    The end result will be that many people who did have savings and had responsibly prepared for the future will have nothing, whilst those whose debts lead to the crisis are defined as `hard working families' and rewarded. And when savers have nothing left, what will the banks ability to lend look like?

    Has there actually been any point to employing the MPC these last couple of years - they have done nothing to achieve what is supposed to be their goal.

    And the inflation is always unexpected. Low interest rates lead to currency depreciation. QE leads to currency depreciation and excess money supply. Imports get more expensive, including raw materials, oil is priced in dollars and we don't get so many dollars to the pound. And we are suprised when inflation increases.

    Can Stephanie please, please challenge the politicians on these and other great points from contributors above.

  • Comment number 100.

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

 

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