Inflation soars

December’s inflation figure was as bad as I feared – and that’s before the force of higher VAT kicks in in January.
The Consumer Price Index, the government’s preferred measure, rose by 2.9%, just a whisker below the level where the Bank of England has to write a letter of apology and explanation to the Chancellor. The Retail Price Index (including mortgages) rose to 2.4%, whilst the RPI excluding housing hit an alarming 3.8%.

The Monetary Policy Committee has a lot of explaining to do. Why were they still worrying about falling prices during 2009 when they were helping unleash this fast rise in prices? Why couldn’t they see the impact of the devaluation of sterling on prices, and the impact of easy money on asset and commodity prices?

As I feared, they have lurched too far again for the third time. Between 2005 and 2007 they kept rates too low, encouraged easy credit and set up the loan bubble. Between 2007 and the end of 2008 they set rates which were too high, presided over a massive contraction of credit and helped bring the economy from boom to bust. Now in 2009-10 they have again set rates that are too low and backed them up with massive quantitative easing. No wonder inflation has gone up.

Their defence will be twofold. They say inflation will come down again after a further rise in the first quarter of this year. That is likely to be true unless there is another devaluation and a further difficult surge in the price of commodities and fuel. They argue that without their expansionary action there could have been a worse recession.

They still need to explain why the UK has been the slowest of the major economies out of recession, given the huge monetary stiumulus. They also need to explain why they did not concentrate on inflation, as they have got it wrong one way or another throughout the last four years. It was easy to see it was going to lift off, yet they took no action to stop it. Maybe the decisions to slash rates and print money owed much to the government. Maybe the MPC felt they could not get in the way of a government determined to borrow lots of money at very low interest rates prior to an election. Perhaps they think our current inflation is a price worth paying for harmony with the Treasury and Number 10.

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18 Comments

  1. Jim Pearson
    Posted January 19, 2010 at 9:39 pm | Permalink

    Hear, Hear!

  2. Donna W
    Posted January 19, 2010 at 9:43 pm | Permalink

    It was obvious this would be the result when Gordon started printing money; I wrote this poem in Sept 2008:

    Gordon and the Banking Crisis

    Good morning all, the PM here;
    Nice to see you – have a chair
    Thanks for coming to listen today.
    I’ll explain how I’m going to make you pay.
    You know – we have a banking crisis
    But that’s why I let you have your ISAs.

    I’m sure you’ve heard of the credit crunch
    The bankers did it, and they’re a bunch
    Of scheming Capitalists, the crooks
    They took your money and cooked the books.
    The Treasury, me and the FSA
    Didn’t know the games they play.

    The fact is, because of the bankers’ thieving
    The Money Markets all are heaving
    Stocks are down, the Footsies plunged
    Nikkei’s fallen, the Dow expunged.
    It really doesn’t seem right to me
    That they should all get off scot free.

    But that’s a matter for another day
    I’ll think about how to make them pay
    But in the meantime, I’m sure you know
    We need the banking system to go.
    Decision needed; no more dithering
    Err, Err, Err ……I put some money in!

    My calculator was close at hand
    I started out with £50 grand
    First I multiplied by 10
    Then multiplied, again and again
    The final figure, give or take,
    Is £500 billion – quite a stake.

    I haven’t actually got the cash
    (Spending plans were rather rash)
    Instead I’ve decided to print the money
    Sounds quite good, but isn’t funny
    Remember Germany, after the war
    Huge inflation – that’s the score!

    I guess I therefore should explain
    The only thing that comes down is rain
    Everything else will be going up
    Fuel, food, taxes – trips to the pub.
    That’s the good news – afraid there’s worse
    Your jobs will be getting rather scarce.

    But my main objective I’m sure you can see
    Is to help the hard-working family
    Money to the banks? – well it HAD to go
    So credit returned and money could flow
    It’s not my fault that you’ll lose your job
    I’ve still got mine: there’s no need to sob.

    There one little problem I’ve yet to fix
    The money they’ve had hasn’t done the trick
    The Markets are all still heading down
    I think it’s funny: I joked – didn’t frown (Concentrate Gordon!)
    It looks like we may still have a crisis
    We’re back where we started …. Now, about your ISAs……

    • Sally C.
      Posted January 20, 2010 at 12:46 pm | Permalink

      Great stuff, Donna! Better than anything our current Poet Laureate has come up with!

  3. Michael Lewis
    Posted January 19, 2010 at 9:51 pm | Permalink

    The government didn't want to tackle the problems in the economy – so they used QE to kick the can down the street; until after the election. Too much debt, interest rates have to go up and that will mean lower real estate prices. That's what this government are terrified about: too many people have their net worth in real estate (in part a response to Gordon Brown stealing pensions) so it is a vote loser.

    I just hope Mervyn King has the decency to resign once the election is called and completed.

  4. Posted January 19, 2010 at 9:52 pm | Permalink

    Hang on, the wheels were meant to survive until after an election.

    • Mark
      Posted January 20, 2010 at 1:43 pm | Permalink

      They were only meant to blow the bloody doors off. The gold slipped into the Alpine canyon along with the Aston Martin a long time ago. Meantime, "Mr Bridger" is getting the applause of the assembled inmates for having pulled it off.

  5. Posted January 19, 2010 at 10:06 pm | Permalink

    Mr. Redwood,

    It's difficult to understand this blog entry. "Inflation soars", "As bad as I feared", and "MPC has alot of explaining to do", but 2.9% is very low inflation — nearish post war lows for Britain — the impact of the comparison to incredibly depressed consumer spending and oil prices in 2008 is clear, and you go on to say the MPC is probably right to argue that inflation will fall back after 1Q10 barring any sudden oil shocks, etc.

    So, inflation is, by anyone's measure, low, the rise, such as it was, came as a result of the very low bar set a year earlier, and you admit that it will probably fall back in 2Q10, yet this blog feels like the end of the world.

    As for why Britain struggled to drag itself out recession:

    1. Countries with large financial sectors were bound to suffer most. How many countries had larger financial sectors than ours in proportion to GDP?

    2. Appalling fiscal incontinence in the run up to the crisis. Running a budget deficit of 12-15% of GDP would have been fine if debt at the point of entry had been lower, and would have had far more impact if it wasn't a move from 5-12% and had been instead -2%-12%. Meantime, the public sector was bloated enough not to have much room to expand to pick up the slack.

    All in all, when monetary policy reaches the limit of its effect — that is when rates hit zero and the central bank is engaged in as much QE as it can reasonably get away with, fiscal policy has to pick up the slack. But ours was too strained.

    It is for this that Brown & Labour deserve to be punished.

  6. JohnRS
    Posted January 20, 2010 at 12:40 am | Permalink

    So an independent Bank, another great Gordon Brown idea, proves its worth.

  7. Kevin Peat
    Posted January 20, 2010 at 3:32 am | Permalink

    Apparently the BoE pension scheme is geared for inflation.

  8. not an economist
    Posted January 20, 2010 at 8:11 am | Permalink

    If one expresses concern about inflation one is usually dismissed out of hand – "now is not the time worry about infaltion – we need to save jobs etc…,"

    I wonder if that will still be the refrain when price inflation is in double digit figures and unemployment is still rising.

  9. Posted January 20, 2010 at 8:16 am | Permalink

    My wife and I were carefully left a small sum of money by my father in law to see us through till our deaths. We originally wanted to pass this on or use it to visit our children who now live abroad.
    So far we have just lost the interest on this, so going abroad is very difficult.
    Now, thanks to the flight of all industry from the country and the burgeoning State Aparat, we stand to lose our savings too.
    And for what – no, sorry – for whom? (Ans=lots of very fat cats and lots of very lazy people)

  10. AndrewSouthLondon
    Posted January 20, 2010 at 9:52 am | Permalink

    Pound climbs up against the euro to 1.45, Mervyn King immediately "renews deficit warning". On every occasion the pound has rallied from its totally undervalued rate the Governor of the Bank of England is suddenly on air warning of doom, it'll take longer, its worse than we thought, any nonsense to talk the pound down. Whose side is he on? He thinks ours. I think not.

  11. Simon Locke
    Posted January 20, 2010 at 9:55 am | Permalink

    A bit of perspective is required. Remember that the monthly inflation figures represent annual changes in the index, measured over a rolling 12 months. Remember what happenned at the end of 2008? The credit crunch kicked in, interest rates were cut reducing mortgage payments, oil prices fell reducing prices at the pumps, VAT reduced and spenders became savers. This all conspired to cause inflation to fall off a cliff. The low months are now rolling off the 12 month index (dec 2008 index was a huge monthly fall) and we will see a return to above average inflation for time. Next month we will see another jump as Jan 2009 (another big drop) rolls off the index. It's critical to remember that we are not seeing a great wave in consumer spending and a knee jerk response by the MPC would be wrong.

  12. Brian Tomkinson
    Posted January 20, 2010 at 10:32 am | Permalink

    Most readers of this blog will not be surprised at this record 50 % hike in the rate of inflation since last month. Nor, unlike the Governor or the BBC, will they expect it to be a short-lived blip. Let us not forget that the government's preferred measure, the CPI, has never been negative, even with a temporary cut in VAT, and apart from the lucky few with a certain type of mortgage we are all worse off. QE was no more than a devise to allow this rotten government to spend money it didn't have disguised as a means of preventing deflation. If I did it to pay my bills it would be called fraud!

  13. Mark M
    Posted January 20, 2010 at 10:57 am | Permalink

    One of the scariest looking pieces of data in this month's figures is the acceleration of inflation. Looking at the actual index, in August it was 111.4. It then went up 0.1 to 111.5 in September, then 0.2, 0.3 and 0.6 to get to 112.6 in December. This is exponential growth – the kind that occurs in countries that print money. Unless we change our course, we're going to be seeing some rampant inflation. Even a standard mathematical look at the numbers gives a 95% confidence forecast of 2.9-4.7% for next month's inflation. Given the continued Q.E. and the VAT rise, my gut feeling is that we're going to be in the higher end of that. 96.5% chance that Mervyn is going to get his pen out.

  14. Javelin
    Posted January 20, 2010 at 2:27 pm | Permalink

    I think inflation is still low – and the danger of inflation being fed back into wages is a low risk as well.

    I do however think that inflation will return in an unrelenting fashion when developing countries start to expand again.

    Food prices in India and China are inflating. At some point they will compete with UK consumers, then exporters will switch their goods to abroad.

    We have done little in the UK (and EU) to secure our food supplies. I fear inflation will set into primary resources such as food, wood, iron and oil.

    I also fear that inbound investment will fall as Eastern countries take money out of the money supply and put it into savings.

    Local workers will have their jobs taken by immigrants with a few more years experience and the ability to survive on lower wages.

    In the next decade the reality of globalisation will sinkm in more than ever before.

  15. Posted January 20, 2010 at 5:39 pm | Permalink

    Not good to see.

    Inflation is still a big fear in the USA. The fear too, is that we are not out of the recession but in the processes of a last gasp.

    With our big push for nationalized health care and huge bailouts it's really just a matter of time before costs soar. Throw into the mix the joblessness and it's going to take a miracle.

  16. Adrian Peirson
    Posted January 24, 2010 at 7:11 pm | Permalink

    But they want this, they want the pound destroyed, our industries, trashed, run down, sold off overseas.
    They are at war with us, they are Communists, they hate Britain and they hate the British people.

    A video from Von Mises on economics
    http://www.youtube.com/watch?v=m-LJ3wZjD4I

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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