Carry on inflating?

Yesterday’s figures for CPI price rises should have been no surprise to all those who have been following the fall and rise of the pound, quantitative easing, and UK tax policy. The distinctive policy being followed by the UK compared to most other advanced countries was always likely to produce higher inflation this summer, and has done so. Indeed, it may even be the government’s intention.

In most advanced countries including the USA prices are falling. Here they have been going up for three main reasons. The first is we are still experiencing the impact of last year’s large devaluation of the pound. We import a high proportion of our needs. It was always going to take time for the impact to come through, as suppliers ran out of more cheaply priced stocks, and as currency cover they had taken out expired.

The second is the cost of government. The UK government is on a run to get its own fees, charges and prices up. There has been no let up in the rise of Council Tax, parking charges and the like. The government is also hiking petrol and diesel tax, which will have a further effect on prices generally, as most goods in the UK are distributed by road transport.

The third is the rise of global commodity prices. This has been brought about by a combination of Chinese re stocking whilst prices are comparatively low, and speculative demand from the US and UK where quantitative easing has created more money amongst investors seeking some risky investments. Commodities have attracted some of this money.

The Bank of England thinks CPI inflation will now take a tumble. Their recent reports have not concentrated fully on price inflation in the way the rules suggest they should. The government seems to favour quantitative easing to try to increase output and speed recovery. It now needs to explain why output has increased in Japan, Germany and France in the last quarter but fell in the UK. Have they noticed that France and Germany had no quantitative easing?

It is quite possible that CI inflation will come down a bit sometime this year, but the Bank should be more worried about future inflation prospects than it is. If the government is trying to create a little bit of inflation for fear of deflation, it should recognise that it is all too easy for a little bit to become a big bit. They should be disturbed about the different path of both output and prices in the UK to other advanced economies. The one thing that is stopping fast inflation in the UK is the poor state of the banks. Sorting out the banks more quickly might be a better policy to get things working again.

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11 Comments

  1. Posted August 19, 2009 at 7:59 am | Permalink

    What constantly needs explaining is the lack of inflation at the moment.
    We have strikes on the railway already. We have the government printing a lot more money. We have a vastly reduced output. As you say, taxes are going up and the government is not cutting back on the profligate welfare state.
    The big question is this: why isn’t inflation like that of the 1970s already upon us like a villain?

    • alan jutson
      Posted August 19, 2009 at 1:46 pm | Permalink

      Mike
      No one wants to spend money, so there is no demand for goods other than the essentials needed to sustain life.

      Have you noticed how all of the power companies and communication companies are chasing customers for payment of late.

      Now theatening letters after two weeks. !!!!!

      Inflation will rip when people start to spend again and demand rises, when restocking on a large scale has to take place.

    • Michael Lewis
      Posted August 19, 2009 at 1:49 pm | Permalink

      To answer you question: The velocity of money. Money being pumped in but not moving around fast enough. Eventually, the log-jam will be broken then we’ll all get a face full of inflation.

      • APL
        Posted August 19, 2009 at 6:49 pm | Permalink

        Michael Lewis: “Eventually, ..”

        Well, yes. But how long is ‘eventually’?

        Employment is plummeting.

        The British are still among the most indebted population in the world. There is a massive amount of personal debt to pay down, there is rising unemployment, many people who expected their house to be their bank or security in old age are having to think again on that score.

        There is a good chance that it will be quite a long time before inflation really gets going.

        The wild card is what happens to the governments finances.

  2. RobertD
    Posted August 19, 2009 at 9:09 am | Permalink

    Increasing fuel duty in Septemeber and reversing the VAT cut in January will certainly moderate any possible fall. Then when the QE money runs out and the govenrment actually has to sell increasing amounts of gilts to real investors who have not been funded by the BofE interest rates will start to rise, kicking up the RPI back into positive territory.

    The only factor indicating a short term fall is the impact of fuel price increases in late 2008 dropping out of the annual calculation. All current changes are pushing the inflation number back up.

  3. Posted August 19, 2009 at 9:24 am | Permalink

    The Guardian writes, “David Cameron warns spending could lead to Britain defaulting on its debt.”

    Is there a plan for the Tories to default on New Labour’s debts?

    If not, why not?

  4. David Logan
    Posted August 19, 2009 at 10:24 am | Permalink

    And there will be further upward bump when the VAT cut is reversed along with the winding down of the scheme subsidising imported cars. I agree that the main driver of inflation in this country is Government taxes and charges. The idea that expenditure could fall or be cut is just not in their mindset. Until it is inflation in the UK will be surprisingly persistent and a dangerous base for when the world economy starts to recover absorbing excess capacity.

  5. Posted August 19, 2009 at 10:51 am | Permalink

    In the last two to three years, as an RIP (retired idle parasite), I have experience significant inflation. Food prices, service charges, rail transport costs (non-commuter), the knock on effect of a range of incidental charges for this and that, and a few other things. As my spending profile, like many of my kind, does not match the theoretical structure of the indexes, these being both manipulated and designed for the high income brackets, we are left out of the equation. I am aware that with depressing interest rates on savings, their intention is to raid the savings accounts of the old and prudent to provide leeway for the quantitative easing, designed to assist the very rich who are needed to restart property price inflation.

  6. Steve Cox
    Posted August 19, 2009 at 11:47 am | Permalink

    That’s a very concise summary of the situation, John.

    With the news today that Mervyn King wanted to print even more money than the MPC voted for, he risks going down in history as the most disastrous Governor of the Old Lady in history, just as Brown is going to be recorded as the worst Chancellor/PM in the last 100 years, at least.

    What’s still completely missing, and King should be deeply ashamed of this given his former ‘hawkish’ credentials, is any sign of a well-planned and balanced strategy to firstly exit, and then reverse QE when the time comes, as it must. Even the madmen in the US Fed are getting cold feet about this idiocy of printing money, but to see that Tim Besley was supporting King in wanting an extra £75 billion… well, the mind boggles. People say that the MPC “knows something that we don’t”, but as it seems to be the inflation hawks who are voting to magic up ever more money from nowhere, all I can surmise is that they have completely lost their marbles. It’s disastrous, but we won’t see just how bad for a few years yet, when inflation will be running at 25% again (or even much, much higher).

  7. Acorn
    Posted August 19, 2009 at 12:00 pm | Permalink

    Two good podcasts at the Economist that support the above. Particularly as QE fuelled inflation is still filed in the pending tray.

    http://audiovideo.economist.com/

    Choose “by subject” then choose “finance and economics”.

    Click on “Central banks’ exit strategies: This way out”. Then second “A hiatus for quantitative easing: A bit of art, a bit of science”.

  8. Adrian Peirson
    Posted August 21, 2009 at 1:00 pm | Permalink

    So all the children and feutoses will have to pay for this extravagance, why, it’s not thier Debt.
    what right have Westminster to saddle our children and even unborn children with these Debts.
    This again is Theft.
    We are told we are born Free, yet we are not because these children yet to be born must work to pay off these Debts, IE they are born into enforced slavery.

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    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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