Inflation: time for the Bank of England to get out more

The government needs an MPC which gets it right. Unfortunately, for the last five years, the MPC has been well behind the plot, lurching from too easy to too tight to printing money.

Today their rationale for believing inflation is not a problem is that our economy enjoys a lot of unused capacity. So, they say, as more money finds its way into the system the UK can just produce more without prices going up. So why then are prices increasing by more than 5% a year (RPI)?

If you talk to manufacturers they will tell you that we now live in a global market. UK factories depend on a global supply chain. Raw materials shot up in price over the last year. Oil more than doubled from the bottom, metals like copper were also bid up rapidly. Now the surging demand in China, India and the rest of Asia, coupled with some recovery in the USA means a shortage of various components. There are price pressures within the global suplly chain. The UK does not have loads of spare factory capacity that it can bring on to insulate itself from these pressures. The long decline of the last decade meant many more closed foundries and factories. The recession also led to reductions of capacity, as firms were forced by a shortage of cash to close their produciton facilities. Many will not reopen.

At the same time the UK has experienced a big devaluation, in part brought on by the money printing in the latter stages of the last government. That too has served to raise industrial costs here at home.

Just as the good inflationary news comes in of a modest revaluation against the Euro countering some of the price increases, UK private sector wage increases start to rise from their very low levels during the recession. Inflation expectations are on the upwards march again. We need a more convincing account from the MPC of why they got it wrong over the recent past, and how they intend to stop inflation from here. Now the currency is beginning to help them they have a chance to break the cycle of rising expectations of more price increases to come.

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12 Comments

  1. Brian Tomkinson
    Posted June 19, 2010 at 9:42 am | Permalink

    The MPC has one tool for curbing inflation – interest rates but the government is consistently talking about keeping interest rates low. Do they actually want to inflate away part of the debt?

    • StevenL
      Posted June 19, 2010 at 8:16 pm | Permalink

      No, they just want to make house prices go up. Everything else comes a distant second place. Why else would they have printed hundred of billions of pounds in government debt and swapped it for unsaleable mortgages with mortgage lenders?

      • NickW
        Posted June 20, 2010 at 10:03 am | Permalink

        I remain convinced that the lending market was rigged by the lender's house price indices, particularly the Halifax.
        Their index included the many remortgages made by their own valuers; keen to support further lending.

      • Mark
        Posted June 20, 2010 at 1:12 pm | Permalink

        That was what the last government did. I'm waiting to see what this one plans to do about the property bubble. There has been a glimmer of talk about restricting mortgages via loan to value limits, which might be a useful starting point.

  2. Geoff not Hoon
    Posted June 19, 2010 at 11:01 am | Permalink

    Mr. Redwood, How far do you subscibe to the 'experts' view that deflation is the real worry not inflation. We hear each time from the MPC that rates are on hold and that one reason they stay low is that inflation will 'soon' begin to tail off. How long can soon be in coming as we have been hearing it for what seems like a year or more to me and in the meantime real inflation is roaring away.

  3. Ex Liverpool Rioter
    Posted June 19, 2010 at 12:25 pm | Permalink

    We need to cut costs, quickly……….the £ will come under attack again. The money from Northsea & the "City" will fall away quickly over the next few years. We need a productive capacity, not paper Fraud from the banks (Have they maked to market their assets yet or just waiting for us to pay them 100% face value?).

    ……………..& the best we can get from "DC" is a pay freeze!
    In Ireland they got a 5% pay cut!

    Mike

  4. Sally C.
    Posted June 19, 2010 at 9:03 pm | Permalink

    Interesting that gold hit a record high price in Dollars, Sterling and Euros this week. The Bank of England, the Fed and the ECB having allowed the biggest credit expansion in history (2002-2007) are doing everything in their power to keep the credit bubble inflated, including outright debasement of their respective currencies via QE, and continuing day-to-day oversupply of funds into the banking system as they intervene in the open market to keep short term interest rates artificially low. While this goes on, gold will continue to hit record highs.

    • waramess
      Posted June 21, 2010 at 10:43 am | Permalink

      Spot on. Pity it will be the Conservatives who have to deflate the bubble. Absolutely the right thing to do but unfortunate that it will be grist to the socialist mill.

  5. NickW
    Posted June 20, 2010 at 9:58 am | Permalink

    Real life experience does not support the myth of overcapacity.

    When I ordered a new oven I had to wait four weeks for it; when I ordered a new bike I had to wait four weeks for it; when the car broke down the parts were not available and I had to wait six weeks for them to be made; when I wanted a downstairs toilet converted into a shower room I had to wait seven weeks before someone could do it.
    The capacity has gone; it is not there to rescue the MPC.

  6. Javelin
    Posted June 21, 2010 at 1:31 pm | Permalink

    It's a very good point you make about the supply chain. The BofE takes a over simplistic view of inflation and slack in the economy. If the price of fuel goes up then we should dig more coal – or so goes their argument.

    For all this talk of slack in the economy they say very little about elasticity of supply.

  7. Conrad Jones
    Posted June 24, 2010 at 2:05 pm | Permalink

    Do you think prices are increasing because of Quantative Easing? Silly question. Shortages in raw materials would obviously have an effect but an inflating money supply would certainly cause costs to go up. It would not be politically damaging for this Government to "ask" the Bank Of England to raise interest rates. Why does the democratically elected Government have to "Ask" a non- elected Central Bank if they could please raise Interest Rates. A central plank in our economic structure – affecting millions of people is controlled by eight non-elected men sitting round an oval table in the 'Bank of England'. Isn't this similar to being controlled by the Deutsche Bundesbanke? Is the Bank trying to attract more debt – what happens when interest rates are forced up? What will the UK Interest Payments be like then? Every three pounds in four of Government Spending?
    Please John, use your influence before it is too late. What can your supporters do to help?

  8. John Robertson
    Posted July 5, 2010 at 7:46 pm | Permalink

    Bearing in mind that a predominatly importing nation has had a 25% devaluation iover recent times against the dollar and interest rates are at an all time low, an increase in prices of only 5% represents something of a deflation. Basic economics, inflation is the rise in prices due to the increase in money supply, nothing else. Money supply has hardly been going through the roof.

  • 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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