Anyone for more inflation?


The government forecasts rising price inflation as measured by the Retail Price Index in the middle of this decade, following a further decline this year.

I regularly warned about too much inflation in recent years, and disagreed with the Bank of England. They were unable to see the inflationary consequences of their policies, which duly led to well above target price rises.  More recently I have agreed with them that inflation would fall this year, as the VAT increases dropped out of the figures and as we got some respite from the falling pound.

So it has turned out. Inflation has fallen a bit as hoped.  Whilst the official government forecasts say that target inflation, (2% on the CPI) will be just fine for the next few years, I think we do need to worry whether this is true. Could the official RPI forecasts be nearer the mark? Could the CPI also rise more than they think in later years?

This week we have been hit by further pressure on pump prices for diesel and petrol. Meanwhile, the near monopoly postal service, still in state hands, has decided on an enormous increase in prices.  We are being made to pay for the decline in traditional mail volumes, and for the continuing inefficiencies of the monopoly service.  The price rise is so high that there could be a sharp fall in volume of use, once the favourable effects of pre buying of stamps at the old prices wears off.

The post item is a one off and a small component of the general price indices. It is, however, a reminder that because the state still is heavily involved in our economic life, there remains plenty of monopoly pricing power that can be deployed against customers and taxpayers. We may see it in car parking charges from Councils, in licence fees, in energy taxes, in public  transport fares, in Council taxes from next year. If at the same time world monetary looseness drives up commodity prices, and UK money operations encourage a lower pound, we could find that inflation once again outperforms the Bank’s forecasts and targets. We may also be entering a period when the Chinese and other producers of cheap export goods for us want fairer prices for what they make.

The government needs to remember that high inflation in its first two years of office has depressed living standards. Fuel and energy prices have become central political issues, as they above all else have squeezed family budgets.  The government should pursue a more energetic competition policy to break up monopoly power and  allow new competitors in crucial services. It should also want the Bank to be vigilant about inflation, after such a long period of letting it be well above target.  With all that Quantitativbe Easing money out there, as the banks do mend so there could be a surge  of credit leading to more inflation. That is not today’s problem, or even tomorrow’s, but the Bank should be thinking well ahead to what can happen. The government itself now forecasts higher inflation and higher house price inflation in due course. They could be right.

Inflation is theft by other means. It may  not even be smart theft. Whilst it does erode the real amount the government has to pay back to those who saved and lent it money, as we saw over the last two years it can also depress demand and lead to the need for yet more borrowing. The recent inflation has depressed spending power and impeded recovery.


  1. Mick Anderson
    March 30, 2012

    Using an “average shopping basket” to calculate inflation is fine from a statistical perpective, but completely irrelevant to the real world. If you added in taxation and charges imposed by all layers of Government, I expect the inflation figures would rise.

    Inflation is becoming more individually variable, especially if your life includes something that the Establishment disapproves of (work, home or car ownership, staying warm in winter, &ct). The official figure seems to be more like a minimum level rather than something economically useful.

    1. lifelogic
      March 30, 2012

      You say “Something that the Establishment disapproves of”:

      Like breathing (CO2), eating, not giving 100% of your earnings to the state, thinking anything un-PC, not swallowing all the green tosh whole, not dumbing everything down, living in a conventional family or trying to provide for them, sending children to a good school …………..

    2. Mark
      April 1, 2012

      Actually, I consider the CPI calculation methodology to be highly dubious. It makes use of “hedonic regression”, a rather crude method of adjustment for quality of goods that gives bizarre results when including things like personal computers, and assumes that we can eat computers if they become cheaper while food becomes more expensive, because the effective weights are automatically adjusted by using geometric rather than arithmetic means. It is a methodology that understates inflation.

  2. Single Acts
    March 30, 2012

    Too late for your blog I appreciate, but if Galloway’s election last night doesn’t demonstrate in stark terms that many, many people now feel mainstream politics has nothing to offer them, then I wonder if the big three parties will ever get it?

    If a currency collapse comes along at some point in the next few years (and some credible Austrians are forecasting just that) this could get very, very ugly.

  3. lifelogic
    March 30, 2012

    Inflation is indeed theft by other means and it not smart theft as it send totally u unhelpful signals to people, investors and industry and makes us all poorer as a result.

    I see that the luncheon voucher tax break of 15p per day has gone in the Budget and that HMRC think £5 is appropriate cost for lunch for worker away on business – not enough for a Cornish Pasty and a cup of tea in London.

    Meanwhile the food and drink subsidy for the house of common works out about £100 per day attended per MP I calculate. One can see how popular the main parties actually are in Bradford yesterday.

    Still we are all in it together as they say.

    1. lifelogic
      March 30, 2012

      I see that on April fools day Nottingham City council is going to be the first to introduce yet another job destroying tax (on work car park spaces). It is already hardly worth working after paying for the car, the VAT, the petrol, the childcare, the NI, the income tax, the road tax, the working clothes, the rates, the council tax & the inevitable driving tax/fines.

      The government should kill all these schemes now before all the other councils was money on “feasibility studies” and “consultants”.

      Who can be surprised that we are heading back into recession.

      1. alan jutson
        March 30, 2012


        Yes, yet another tax on the workers.

        They spend thousands of pounds on attempting to attract businesses to the area, then wipe it out with other actions.

        The logic perhaps used used:

        If everyone does it, then Nottingham will be no worse off.

        I wonder how many will join them ?

      2. zorro
        March 30, 2012

        Allowances have not increased for years and their value has been seriously erodsd by inflation.


    2. Graham
      March 30, 2012

      I despair that the likelihood of any joined up thinking by politicians will never ever happen.

      Just like taxing shops in town centres so that they close and move then following on with a stupid pilot to ‘enliven’ town centre by the Housing Minister – using taxpayer funds!!

      The whole scenerio at the moment is very frightening.

    3. Disaffected
      March 30, 2012

      QE is stealing pension value by stealth, it is stealing savings and now they want to tax the elderly even more. Is this a genius strategy by the Tory led Coalition?

      We are paying for the Coalition’s inability and lack of courage to implement spending cuts to reduce the debt and deficit.

  4. colliemum
    March 30, 2012

    It looks as if the events of the 1970s have been wiped off the minds of treasury advisors, politicians and bankers alike. Instead we seem to walk heedlessly into yet another round of inflation.
    Much fun has been had at the obsession of the Germans with keeping inflation down as a priority for bankers and politicians. It seems their traumatic experience in the 1920s, with all that followed, is looked at as a one-off, a bit quaint, and of course it couldn’t happen here. It did happen here, to a certain extent.

    Perhaps it is time for politicians, bankers, media and civil servants to take a leaf out of the German’s playbook and do their level best to curtail inflation now. After all – whose economy weathers crises better, whose economy seems to do better, long-term, than any of the other EU countries?

    Perhaps the book by Adam Fergusson “When Money Dies” should be required reading for civil servants, bankers and politicians …

  5. James Reade
    March 30, 2012

    What another beautiful massaging of events John – bravo!

    Please find me where the Bank didn’t forecast this current fall in inflation. Please go through all the minutes of their meetings and tell me if you find no mention at all of VAT (which I was telling you about actually in all of your inflation rants over the last year – you weren’t mentioning it you were just moaning about your supposed superiority at understanding the economy than the Bank – blaming inflation on QE).

    It would be nice to have a link to this supposed forecast. Why do you believe a government forecast that is made for a time years and years ahead? Aren’t you aware that even the best forecasters struggle to look at such far-ahead horizons, let alone the government?

    And so you base another entire post about inflation on this? I particularly enjoyed this: “If at the same time world monetary looseness drives up commodity prices”. Classic stuff. It’s not like it’s world demand or something because a rather large country with over a billion people is starting to develop rapidly hence consume much more in the way of commodities globally, is it? Nope – it’s all the Bank along with their other cronies at other central banks that’s pushing up all these prices.

    It’s worth noting Adam Posen has written about why he sees the US as having grown much more strongly than the US recently (mimicking your style John I’m not going to provide a link). Funny how his explanation differed quite a bit from yours. Funnily enough, I’m more likely to listen to an economist on the economy, rather than a politician. They have fewer axes to grind, fewer incentives to distort the truth for some kind of perceived benefit.

    Reply: Thank you for your error strewn post. I said that I agreed with the Bank’s forecast of falling inflation this year so your first point is bizarre. I forecast the rise in inflaiton which the Bank missed, and then agreed this year with their forecast of a fall, which is now happening.
    I think the government longer term forecast of a rising RPI might be right about the trend looking at the monetary situation in the UK and the wider world, looking at the likely trend of wages and the demands on world resources. What is your forecast if you disagree?
    I agree that a secular increase in demand for commodities from BRIC growth can drive up prices, but as the last few years show commodities remain very volatile and do from time to fall sharply despite the continuing force of increased BRIC demand. These movements are related to changes in world money supply, credit and liquidity.

  6. alan jutson
    March 30, 2012

    Inflation = Theft from the prudent on fixed incomes.


    Inflation= Help for those who have borrowed beyond their means.

    1. alan jutson
      March 30, 2012

      Held in moderation !.

      Too close to the truth John ?

      Thought you would agree with the comment.

    2. lifelogic
      March 30, 2012

      Not even helping borrowers much – unless they are on old loan margins as the banks are now charging such big margins and fees when they do lend at all.

  7. Brian Tomkinson
    March 30, 2012

    The OECD advises the BoE to print even more fake money; perhaps they don’t think inflation will be high enough. Despite all their dissembling, this government’s policy to deal with the excessive debt has all along been increased taxation, devaluation and inflation. Nothing will change with Cameron and Osborne in the two top jobs. The shambles of the last two weeks must have brought home to Conservative MPs that they are being badly led. Will they do anything? I doubt it, but the voters will.

  8. David
    March 30, 2012


    Good that you are highlighting this. I have made several comments on this blog regarding inflation and I still maintain that the BoE forecasts underestimate where inflation will be both later this year and 2013-15.

    As I have said before, it is in the interests of the BoE for 2 reasons: (i) to inflate awau (to some extent) the debt and (ii) the BoE has its own pension fund mainly invested in inflation indexed bonds.

  9. Alan Wheatley
    March 30, 2012

    Is it possible to control inflation by a single mechanism when the causes are many and varied?

    “Steady Eddy” did quite well for a period, but perhaps he was just lucky to be in charge when circumstances were benign.

    How do you keep inflation within target limits in response to the two step changes caused by a change of VAT?

    The notion of being able to control inflation by changing interest rates struck me as dubious from the outset, and I think the time is well past for a fresh, critical look at the concept.

  10. zorro
    March 30, 2012

    My analysis re inflation has been consistent. The rate will continue on the trend of recent years and increase a little more…..if we’re lucky. However, I hold no confidence in this government’s ability to restrain the fruits of their QE policy. People need to think very carefully about where they put their fiat currency….Unfortunately, the only strategy this government has is to print and hope for recovery to cover their spending and hope for a soft inflaionary default. Tbis is what the facts show…..they may be disappointed….


  11. Acorn
    March 30, 2012

    Lower inflation means a higher real rate of interest on borrowings, because the reduction in inflation can no longer be offset by interest rate cuts at next to zero BoE rates. Similarly, an increase in inflation will increase consumer demand, because the increase in inflation will no longer be offset by an increase in the nominal interest rate; hence, higher inflation implies lower real interest rates and thus higher demand.

    The BoE needs inflation by the truck load and is going to arrange for it to happen. So go out and buy a house and a 60 inch plasma TV to put in it now; cos Merv King wants you to know that it will be dearer next year and even more the year after.

    If you didn’t already realise, we are being used as Guinea pigs in an economic exercise. Old fashioned monetary policy in the UK with fiscal austerity. More or less the opposite in the US. Mary Portas’s celebrity economics in the high street is a supply side intervention when the problem is the demand side – your family; my family households – up to their whatnots in debt; they ain’t going to be spending much any time soon. When they do, it will be cheaper in an out-of-town Supermarket or Mall.

    Must finish now, the Cabinet Lab Tech is coming, I have to panic and go and join a petrol queue.

  12. Electro-Kevin
    March 30, 2012

    Where a monopoly lacks competition it benefits from economies of scale.

    However, the post office does have competition. In the form of the internet, UPS and a myriad of other despatch companies. Competition appears to be the problem and so we are getting higher stamp prices; we are likely to get a smaller, lower paid, workforce (more welfare) and we will keep the massive pension liability by the looks of things.

    Can we crack on with private sector monopolies and cartels ? Such as dentists raking off massive amounts for work that technicians could do off site.

    1. Electro-Kevin
      March 30, 2012

      Not against privatisation per se. Just recognise that it’s not always the panacea that it’s made out to be.

      (Will stamp prices return to normal levels on privatisation btw ?)

      1. alan jutson
        March 30, 2012

        Eletro kevin

        I see on the news this luchtime that the Humber toll bridge is to reduce its toll charges by 50% from the weekend.

        It would seem that its taken them nearly 30 years to work out, too few cars are using it due to its cost.

        I wonder if the Governments proposed new road charging scheme consultants were aware of such motorists behaviour/thinking, before they jumped in and recomended such a possible policy.

        I wonder how long before we get another policy “U” turn ?

        Probably just before the next election.

        As for your question about stamp prices being reduced once it goes Private. Do not hold your breath as we have plenty of history with the utilities, and the railways, all now the most expensive in Europe I believe (and they still get some form of subsidy).

        1. alan jutson
          March 30, 2012

          I see from the news that the Germans are no longer going to build for us two new nuclear power stations.

          Do you think these are simply negotiation tactics by them, awaiting for a government subsidy to proceed ?

          Clearly we need more power stations, and rather rapid too.

          Does the Government have any other options/Irons in the fire so to speak ?.

        2. Mark
          April 1, 2012

          Grimsby is onomatopoeic.

  13. Gary
    March 30, 2012

    Demand and supply is reflected by price. Price indicates where there are shortages or surpluses. Economic investments can be made accordingly. When price is distorted by inflating the money supply, economic investments cannot be made, shortages and surpluses are masked, and investment is misdirected. Not only is inflation a theft, it screws up the entire economy. Only the bankers benefit. Whose side is the BoE on ?

  14. Gary
    March 30, 2012

    I might add, that even the central bank mandate of price stability damages the economy by masking oversupply and shortages. The central bank underwrites risk and transfers it to the taxpayers. The central bank should be shut down.

  15. forthurst
    March 30, 2012

    “Cuts, what cuts? These cuts Mr Redwood”

    Reply: The trick in this response is to concede my main point, but then to adjust future figures with unspecified price increases to get to real declines. At a time or wage freeze in the public sector the cost impact should be limited.

  16. waramess
    March 30, 2012

    The effects of QE are a disaster waiting to happen. If the new money is spent differently to the money already in the system then the effect of its introduction will be different.

    So far the new money has either found its way into the banks’ own accounts with the Bank of England or into the government’s own accounts to support their spending.

    Volatility is the key and when the new money enters the system properly and circulates at the same rate as that already there then at some point in time we will see inflation in spades and should the volatility increase, then the tiger the government believes it has by the tail will be well and truly out of control.

    In Japan the government have been printing vast amounts of money but the people will not spend ,and it all ends up in savings accounts notwithstanding the low rates of interest.
    Lets hope the Brits do the same and keep hyperinflation from our doors

  17. sm
    March 30, 2012

    Someone said it was like boiling the frog. Some frogs are hot and bothered and in distress wanting to jump.

    Meanwhile if interest rates were not prevented from rising, how many banks that have paid out bonuses would be in trouble.

    How long have interest rates been kept at emergency levels? How long is a long term incentive plan? Should not the bonus payment etc be stayed whilst systemic emergency measures are in place or compulsory vested in irredeemable or 100 year GILTS until the end of emergency measures.

    Should all public pensions be compulsorily invested in non inflation linked GILTS, no defined promises, just cash invested in GILTS. I wonder if the approach to inflation would change?

  18. a-tracy
    March 30, 2012

    Why have the government nationalised the Royal Mail pension promises to workers? That is the real hole in the entire company. The final salary guaranteed pensions in the public sector will have to be dealt with soon (and I don’t just mean tinkering around the edges and with new recruits only – those new recruits and all the other workers are the ones you’re all depending on honouring your unaffordable promises) and you all know it.

    Businesses need to get their fingers out and sort out electronic mailing of invoices to each other.

  19. Lindsay McDougall
    March 30, 2012

    Now is the time to go for zero inflation. Raise the base rate to 2% or 3%, removing shackles on the banks (except for the threat of bankruptcy if they fail). Begin cutting public expenditure in earnest, removing all index linking of public sector pay, unemployment benefits and state pensions. Paradoxically, confidence will return because confidence occurs when people realise that the government is sane and constructive.

  20. Electro-Kevin
    March 30, 2012

    I hear that the BRICs are very unhappy with QE in the west.

  21. Sean O'Hare
    March 30, 2012

    Inflation is theft by other means.

    Inflation is but one way that government thieve from the people and probably the least fair as it hits pensioners the hardest. For the BoE to continue with a strategy leading to high inflation whilst artificially holding interest rates low will go down as one of the most perverse in history.

  22. uanime5
    March 30, 2012

    Given that the post office is so expensive I can never understand why private companies use it to dispatch their products. You’d think major retailers would create their own delivery service or use a private delivery company.

    1. Bazman
      March 31, 2012

      Catalogue companies do.

  23. Caterpillar
    March 31, 2012

    The BoE/MPC has failed to fulfil its mandate which is first inflation (characterised by the CPI annual rate) and subject to that support of other Govt economic policy. I suspect many people accept QE1 and initial emergency interest rate drops for fear of the whole system collapsing, but thereafter without a Govt change in target the BoE/MPC have failed, the Coalition Govt has failed to hold the BoE/MPC to acccount and the opposition parties have failed to hold the Govt to account.

    Specifically (and selectively ltd) within the current system I would question;

    (i) The apparent (in)ability of the BoE to calibrate its forecasts – decision & risk analysts can do this why can’t economists?
    (ii) The apparent BoE (lack of) understanding of business – almost anyone who has read a business book would appreciate that businesses will change product mix and change focus on margin vs volume as input costs are forced up by weakening currency. Don’t economists understand business behaviour?
    (iii) The continued apparent BoE (lack of) understanding of business – almost anyone who has read a business book would appreciate that general business investement will be depressed when less efficeint and marginal businesses are propped up. Don’t economists understand business behaviour?
    (iv) The apparent inability of the BoE to apprecaite endogenous and recursive effects. As prices have increased the actual quantity demanded by consumers has gone down, so what are the options – less demand for workers, less need for efficiency, switch from K to L – either way a reinforcing feedback with deleterious consequences. Why can nearly any system dynamicist understand this but apparently not economists?
    (v) The apparent inability of the BoE/MPC to escape its cognitive biases. For example Mr Posen quoted in THE March 2011 Guardian artice “It would not just be terrible that I had messed up for other people but it is also my fundamental world view that I have been testing.” I have read this so many times and been close to terrified. Do economists recognise potential cognitive biases (there is no Tversky and Kahneman defence, they weren’t economists)?
    (vi) The apparent inability of the BoE/MPC to recognise what it has said. The BoE/MPC members defended their effect on pensions by arguing that the boost to equities from QE offset the annuity rate fall … did they really argue that chucking money in created an equity bulge/bubble (let’s call it inflation not measured in CPI) and used this as a defence. Physiologists understand how feet and mouths should be associated …
    (vii) Exisiting ECB research suggests a relationship between high inflation and slowed growth. Commentators to JR’s diary can read …. do ecomomists?
    (viii) The +/- 1% variation around target is not set as control limits based on system volatility. A production engineer or even a quality consultant would wonder about where to set limits …
    [The list could continue.]

    Aside from the current system, I would question of the Coalition and oppostion;

    (i) Why continue with a CPI rate target if is not held to (honesty?)
    (ii) Why continue with a rate limit at all given the get out of future medium term? A price target would avoid this.
    (iii) If BoE monetary policy cannot hit its target because it cannot sufficiently affect the system, then why maintain a pretence, interest is politically set and so should be set by policitians and debated accordingly.

    And in a wish world

    (iv) How could the central bank be dumped and allow the free market to truly set interest rates and to price inter-temporal preferences? (Does democracy generally prevent a free market?)

  24. Mark
    April 1, 2012

    I note that banks are reluctant to lend under Mr Shapps’ scheme to try to support the pricing of newbuild properties with 95% LTVs and guarantees. It’s part of the inflation problem, not the solution: tying up money in mortgage lending won’t help businesses.

    Meantime SDLT (and perhaps an attempted assassination) are already chilling the London property market.

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