Inflation and the hapless MPC

As predicted here inflation continued to rise throughout Q1, hitting a new high of 3.4% on the government’s own CPI measure (target rate 2%) and reaching 4.4% on the more used RPI. Excluding housing the RPI rose by 4.8%.

This means as warned there is a ferocious sequeeze on living standards underway. Wages are going up only by around 1% on average, with some people experiencing declines. The price of petrol at the pump, food prices, heating bills and many other items are putting pressure on budgets.

The Monetary Policy Committee has obviously given up the day job of keeping inflation down to 2%. They are just helping the government’s pre election stimulus in a public sector led economy. I wonder what their excuse will be this time? It was all so predictable. They have lurched from too easy to too tight to too easy again! Why do they find it so difficult to see the obvious and read the cycle?

They should be telling the government the banks are not working properly, the economy is lop sided, official interest rates are unrelated to private sector reality and the public sector stimulus has forced the pound down so far, causing imported inflation. The fact that they say none of this shows they are neither independent in thought nor sensible.

Promoted by Christine Hill on behalf of John Redwood, both of 30 Rose Street Wokingham RG40 1XU

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27 Comments

  1. Peter Turner
    Posted April 20, 2010 at 1:08 pm | Permalink

    Meanwhile, interest rates for savers are at an alltime low, the base rate determined not by the market but by the Bank of England. This means that mortgage holders are receiving what amounts to a subsidy whilst those who have saved for their old age, particularly pensioners, are now receiving a very raw deal. How long can this go on?

    • Pauper
      Posted April 20, 2010 at 5:41 pm | Permalink

      Mr Turner, you're bang on the debauched and vitiated money. Savers paid for the boom by suffering politically manipulated toytown interest rates; they paid for the bust with interest rates effectively below zero, and they'll pay for the recovery by having their nest-eggs trashed by inflation. It says on my fivers "I promse to pay the bearer £5", not "£5 less a 3.4% haircut to teach you to believe Her Majesty's Government, you contemptible little person fit only to be robbed".

      What lesson will honest people learn? That prudence is folly, and lifelong fecklessness the highest financial wisdom?

    • BillyB
      Posted April 20, 2010 at 11:51 pm | Permalink

      epso-farking-lutely. The propensity and motivation to save has been jettisoned by all the major parties, and they don’t seem to give a toss. This seems to upset the general theory of economics 101 about how a market economy works… What gives?

      • APL
        Posted April 21, 2010 at 12:53 pm | Permalink

        BillyB: “economics 101”

        Politics 101 superceeds economics 101.

        Politics 101, spend like crazy on ludicrous schemes while the times are good. Not forgetting the nice little padding on the state funded pension and the expense account. Then when things turn nasty, blame the bankers and strip the wealth from the working fraction of the population.

  2. Lindsay McDougall
    Posted April 20, 2010 at 2:31 pm | Permalink

    I want to write about the fiscal deficit and debt (again) so I will start off by saying that if you run high deficits for long enough you usually end up printing money.

    The Conservative manifesto says "We will safeguard Britain's credit rating with a credible plan to eliminate the bulk of the structural deficit over a Parliament."

    Bulk of? Structural? Room for backsliding here, so I thought I would see if anyone had defined and quantified the structural deficit (all figures in 2010/11 prices unless otherwise stated).

    Definition: 'Structural deficit differs from cyclical deficit in that it exists even when the economy is at its potential' (Source:Wikipedia). This sounds related to the old Nixon idea of wanting a budget that would be balanced if there were full employment.

    That's the easy bit. The fun comes when you start to quantify it. I quote three sources:

    Source 1: HM Budget Report 2010. Structural deficit in 2010/11 will be 7.3% of GDP vs 11.1 % of GDP for the cyclical deficit (i.e. £107 bn vs £163 bn).

    Source 2: Institute for Fiscal Studies. IFS estimates that the structural deficit hs inceased from £45 billion at the time of the 2009 budget to £90 billion (this figure may be in 2009/10 prices and may be slightly out of date).

    Source 3: Bank for International settlements. BIS believes that the structural deficit will be 9.0% of GDP in 2010/11. That works out at £132 bn.

    So three estimates of the UK structural deficit range from £90 billion to £132 billion. That's quite a spread, so my question is simple. How big does that Conservative Party believe the structural deficit will be in FYR 2010/11 in 2010/11 prices?

  3. Brian Tomkinson
    Posted April 20, 2010 at 4:08 pm | Permalink

    The Bank of England isn't independent. They are robbing savers to subsidise mortgages to help this ruinous government before the election. Furthermore they and the government have no intention of doing anything other than inflating away the debt they have accumulated by wasteful spending. The irony is that your party wants to give them even more control. I wonder why?

  4. Stuart Fairney
    Posted April 20, 2010 at 5:32 pm | Permalink

    Yep, it's another disaster in the offing and I don't see Cable being the man to deal with the problem now that Mr Darling has apparently packed up.

    In fairness to you JR, you have been dead right financially over the last two years.

  5. Antisthenes
    Posted April 20, 2010 at 6:03 pm | Permalink

    Slowly the chickens are coming home to roost, QE, bailouts and massive PSBR are turning round to bite everyone in the bum. The Conservatives were right to warn about a massive bean feast but poo poo to that said labour until after the election anyway. The rest of the data due shortly will no doubt be more encouraging but it will just be a timely for Labour blip.

    Hung party probably best thing for Conservatives hang back and let Labour reap what it has sown if the Lib-Dems join them well they will only be joining a multicar pile up and they can end up on the scrap heap too.

  6. Simon
    Posted April 20, 2010 at 6:43 pm | Permalink

    There is no excuse for the pitiful base rate anymore, especially now they're stoking another house price boom. Funny how it's always temporary when inflation is on the way up but not when it falls. As far as I recall there have been zero letters to the Chancellor because inflation has undershot, I've lost count of how many have been written because it's overshot. I honestly don't know why we bother with the MPC. I can only assume they're trying to inflate away the debts at the expense of the sensible.

  7. Mike Stallard
    Posted April 20, 2010 at 6:53 pm | Permalink

    Have I got this right?

    In order to support the Public Sector, (bloated and useless), and the Welfare State (which actually stops people working, being healthy, learning stuff and so on), the government is rapidly going broke.

    In order to pay its debts, the government is selling gilts and these are being bought up by all the banks as increasing rates of interest, so there isn't any money for the "recovery".

    Private sector people who drive the economy are without capital therefore. So there isn't much growth going on.

    Mr Brown looks like being re elected, thanks to the genius of Nick Clegg, the new Winston Churchill, and the economically brilliant Vince Cable, and Mr Brown firmly believes that everything is going as well as can be expected.

    The markets, however, increasingly disagree with this diagnosis, hence the fall in the pound and consequent inflation.

    PS In Norway, which isn't really in the EU and which isn't badly managed, a beefburger in McDonalds costs just under £15.

  8. alan jutson
    Posted April 20, 2010 at 7:00 pm | Permalink

    Do not worry, the Bank of England will write another letter to Gordon.

    That will solve it.

    We import much, the pound has been devalued by 25% in a year, so we have got inflation.

    Is anyone surprised ??????

    • Lindsay McDougall
      Posted April 21, 2010 at 11:03 am | Permalink

      NOT THE GOVERNOR’S LETTER

      Dear Prime Minister,

      The overall price level, and by extension the rate of inflation, is determined by the total amount of money and the total amount of goods and services it is pursuing.

      Therefore, if we print a certain amount of money and real GDP growth turns out to be less than anticipated, the result will be greater inflation.

      We were foolish enough to believe the cock eyed optimism about real GDP growth contained in the 2010 budget report. The Bank of England’s own economic models are telling the same story. Nonsense in, nonsense out, eh?

      This over estimation of GDP growth is likely to continue for some years, so you must expect inflation to continue to overshoot.

      I won’t write another letter to you but simply circulate a poem every month until a new regime is in place. The poem starts:
      The second verse is the same as the first
      Hey ho says Rowley.

      Yours Faithfully,

      King of Money

      • Mark
        Posted April 21, 2010 at 9:30 pm | Permalink

        A Frog he would a-wooing go
        Whether his mother would let him or no
        Hey-ho said Anthony Rowley

        The Frog, Rat and Mouse all came to sticky ends.

  9. JimF
    Posted April 20, 2010 at 8:58 pm | Permalink

    Your words are sane and true, and those of your leaders are not ringing in our ears on these points….

  10. Lola
    Posted April 20, 2010 at 9:12 pm | Permalink

    It’s von Mises in action. If you make too much money the general price level will rise. And if you add excess taxation into the mix – bingo – bang goes the wealth of the nation.

  11. ps
    Posted April 20, 2010 at 10:30 pm | Permalink

    John, another lot for the chop if the Conservatives ever managed to get re elected (alongside FSA, Met office and every other politicized useless bureaucracy that kow tows to this so called government).

    If the other lot(s) get elected then God help us, as gradually everything comes to serve the party and truth & objectivity disappear in the brave new world.

  12. Sally C.
    Posted April 20, 2010 at 11:33 pm | Permalink

    We are all suffering a loss of purchasing power in two ways; firstly, as a result of the devaluation of Sterling (which is at least partly due to QE); secondly, as a result of the lack of action on the part of the Bank of England to raise interest rates and help savers to keep their heads above water. The Bank of England is deliberately destroying the value of our savings. It is an outrage and as usual we are powerless to do anything about it.

  13. Mark
    Posted April 21, 2010 at 2:30 am | Permalink

    I prefer to look at inflation rates by analysing the shorter term movements in the underlying RPI index on an annualised basis. That avoids "one off" effects such as the VAT reduction once the effect is out of the time window you are looking at.

    RPI showed an annualised rate of 8.5% on a month on month basis, and the recent run of figures has been 8%, -0.5% (in Jan, affected by January sales) and 7.4%. The quarterly and six monthly rate annualised are both just over 5%. The RPIX figures are almost identical. The numbers suggest that the real underlying rate is now probably close to 8% (after the January sales drop out), and may be still rising.

    Try factoring that into government budgets on index linked spending. There's a bit over £1.3bn to add to the redemption bill for index linked gilts for the most recent month's increase – never mind the interest payments. Pensions? PFI? You name it.

    Brown will be annihilated at the election. Perhaps after it some of these truths will emerge and there will be a chance to do something to rescue the situation, though it is looking as though a second election will be forced within the year either by market events, or a tactical end to any minority/coalition government that forms by the Lib Dems seeking to enhance their position. Since voters are reluctant to face reality at the moment, perhaps it is best that reality can be unveiled by a new parliament before hard choices have to be made. There may be more to observe from other countries under stress to concentrate the mind.

    • Mark
      Posted April 21, 2010 at 9:48 pm | Permalink

      A couple of other statistics to add:

      Nationwide house price index shows prices are 11.3% higher than the dip reached last February – so inflation remains rampant there, doing nothing to increase affordablility.

      National debt now exceeds £1 trillion DMO figures show. Add the gilts in issue (including uplift for inflation) – a figure which increased overnight from £922.27 billion to £ 961.37 billion as a result of the added inflation indexing and additional borrowing – to the stock of Treasury Bills as at the end of March (some £63.335 billion), for a total of £1024.7 billion. This excludes Bills issued in support of the Credit Guarantee Scheme and the Special Liquidity Scheme.

  14. olly garchy
    Posted April 21, 2010 at 2:08 pm | Permalink

    It's been their plan all along, with the collusion of the (obviously non independent) BofE.
    ____________________________________________
    The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.
    John Maynard Keynes

  15. Steve Cox
    Posted April 21, 2010 at 2:25 pm | Permalink

    Well said, John, I'm glad that there's still someone in a public position who is worried about inflation. I could hardly believe Edmund Conway's article in The Telegraph this morning:
    http://blogs.telegraph.co.uk/finance/edmundconway

    in which he says that: "…as I’ve said before, it would be extremely foolhardy to assume we can now declare victory over deflation…"

    Has he taken leave of his senses? Are almost all financial commentators, as well as the entire BoE management and MPC, sniffing some sort of illegal substances? The current situation of low to zero interest rates plus high inflation is penalising the most blameless people, the savers and the pensioners. What kind of a sick sadistic society have we become when people not only accept this but seem to actively encourage this.

    The British: such a parcel of rogues in a nation.

  16. James Z
    Posted April 22, 2010 at 3:14 pm | Permalink

    Say what you will about Clegg, he still rose in the polls dramatically.

    Best polling site i've seen so far:
    http://www.10downingtweets.co.uk/

  17. Jeff
    Posted April 25, 2010 at 2:49 am | Permalink

    We are all suffering a loss of purchasing power in two ways; firstly, as a result of the devaluation of Sterling (which is at least partly due to QE); secondly, as a result of the lack of action on the part of the Bank of England to raise interest rates and help savers to keep their heads above water. The Bank of England is deliberately destroying the value of our savings. It is an outrage and as usual we are powerless to do anything about it.

  18. Karen
    Posted April 25, 2010 at 10:01 am | Permalink

    Yep, it's another disaster in the offing and I don't see Cable being the man to deal with the problem now that Mr Darling has apparently packed up.

    In fairness to you JR, you have been dead right financially over the last two years.

  19. Dave
    Posted April 25, 2010 at 3:02 pm | Permalink

    Slowly the chickens are coming home to roost, QE, bailouts and massive PSBR are turning round to bite everyone in the bum. The Conservatives were right to warn about a massive bean feast but poo poo to that said labour until after the election anyway. The rest of the data due shortly will no doubt be more encouraging but it will just be a timely for Labour blip.

    Hung party probably best thing for Conservatives hang back and let Labour reap what it has sown if the Lib-Dems join them well they will only be joining a multicar pile up and they can end up on the scrap heap too.

  20. Sean
    Posted April 27, 2010 at 1:52 am | Permalink

    Say what you will about Clegg, he still rose in the polls dramatically.

  21. Joe
    Posted April 27, 2010 at 7:38 pm | Permalink

    Well said, John, I'm glad that there's still someone in a public position who is worried about inflation. I could hardly believe Edmund Conway's article in The Telegraph this morning:
    http://blogs.telegraph.co.uk/finance/edmundconway

    in which he says that: "…as I’ve said before, it would be extremely foolhardy to assume we can now declare victory over deflation…"

    Has he taken leave of his senses? Are almost all financial commentators, as well as the entire BoE management and MPC, sniffing some sort of illegal substances? The current situation of low to zero interest rates plus high inflation is penalising the most blameless people, the savers and the pensioners. What kind of a sick sadistic society have we become when people not only accept this but seem to actively encourage this.

    The British: such a parcel of rogues in a nation.

  • 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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