Why has inflation been above target by so much for so long?

 

Everyone agrees the main aim of Labour’s Bank of England was to get inflation down to 2% and keep it there. Most also agree that the Bank has been singularly unsuccessful at doing so.

Inflation as measured by the last government’s second choice of target, the CPI, surged to 5% in 2008. It has been above 2% for most of the last three years, often by a significant margin. Throughout that period the Bank has published fan charts showing inflation coming down quite quickly to the 2% level or below. The Bank has usually argued that the prospect is finely balanced between an overshoot and an undershoot. So far it has always overshot.

The Bank has argued that much of the inflation has been “imported” and so not so susceptible to control by changes in domestic interest rates. However, the period is characterised by a major devaluation of the pound.  By the end of 2008 the pound was around one quarter below its 2007 highest  levels.  The surge in world commodity prices at the end of the last decade did not  induce the same big increases in inflation in Euro and US markets that it helped induce in the UK. Subsequent falls in many commodity prices did not get UK inflation back down to target. A devaluation may well have something to do with the quantity and price of money.

The Bank in its defence is right to point out that the UK has not suffered a wage/price spiral in recent years, so  inflation has not soared above the 5% level. It is right that fighting recession requires looser money anyway – the problem with that argument is they did not deliver it at the right time as we discussed before.

The Bank is trying to control price rises in an economy which is vulnerable to import prices on  weaker sterling, vulnerable to energy and raw material prices, and vulnerable to state price rises and tax rises as the government battles to get the deficit down by increasing state revenues.

If the bank had moved interest rates higher in 2005-6 it would have curbed the inflation that broke out, and would have restrained some of the excess credit creation that followed. If the government had not run such a large deficit before the recession boosted spending  and cut taxes, that too would have helped keep price rises under control and would have given the state more flexibility in the downturn. If the government did more deficit reduction by controlling costs in the public sector, and less by pushing up taxes and charges on the private sector, that too would cut the inflation rate.

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65 Comments

  1. lifelogic
    Posted June 1, 2012 at 5:38 am | Permalink

    Clearly inflating debts down is an unspoken part of government policy. “Imported inflation” is just a dishonest word for deliberate the devaluations of the pound (still I am positioned to profit from it I suppose).

    As you say “If the government did more deficit reduction by controlling costs in the public sector, and less by pushing up taxes and charges on the private sector, that too would cut the inflation rate.”

    Indeed and it would also stop the tax base declining, the benefits bill from growing, create some real jobs and stop the strangulation of the real economy.

    Cameron, is seems, would rather just hand on an even bigger mess to the Labour, Unison puppet, in 2015 than start to address any of the real problems. While mucking about with silly gimmicks (with anyone he can find who has done a tv programme – it seems).

    The man is clearly, genetically, a pro EU, socialist – what can one do but replace him I cannot see him changing?

    • lifelogic
      Posted June 1, 2012 at 7:23 am | Permalink

      I see that a recent survey has found that “the more scientifically illiterate you are the more you believe in climate change”. I am not at all surprised. Few with an intelligent and questioning mind could swallow it whole. Anyone who understand much physics, energy systems, and probabilities can see it is largely bunk. Even the solutions proposed are nonsense in carbon, engineering, world and economic terms.

      Art graduates, BBC “thinkers”, Libdems, Prince Charles, Cameron and many other “Actors” seem particularly susceptible to the warming religion.
      The same sort of people who buy lottery tickets, talk to plants or suffer from other irrational belief systems such as horoscopes. Strangely they are often the same people who spent much of their time flying round the world.

      http://blogs.telegraph.co.uk/news/jamesdelingpole/100161868/official-the-more-scientifically-illiterate-you-are-the-more-you-believe-in-climate-change/

      • lifelogic
        Posted June 1, 2012 at 6:20 pm | Permalink

        Often this goes with a strong belief in quack medicine too I find. Much of it paid for, by taxpayers, through the NHS – totally absurdly.

      • uanime5
        Posted June 1, 2012 at 8:29 pm | Permalink

        If you’re going to discuss scientific research you should link to the actual report, not a biased journalists interpretation of this report.

        Here is the actual report:
        http://www.nature.com/nclimate/journal/vaop/ncurrent/full/nclimate1547.html

        Here’s the reason it gives for why people believe in or oppose climate change:

        “For the ordinary individual, the most consequential effect of his beliefs about climate change is likely to be on his relations with his peers.”

        So people believe in or oppose climate change not because of their level of scientific knowledge but because of their peers’ beliefs. So lifelogic your claims that scientifically literate don’t believe in climate change because they’re intelligent is incorrect. They don’t believe in climate change because their friends don’t believe in it.

        Also the test only covered basic science with questions such as ‘Electrons are smaller than atoms [true/false]’. Therefore those classed as ‘scientifically literate’ only had to demonstrate a basic knowledge of science.

        • lifelogic
          Posted June 2, 2012 at 7:29 pm | Permalink

          You do not need much more than a basic knowledge to see it is a complex chaotic system and that people who cannot tell you the weather in ten days times are unlikely to have much to say about 100 year times.

          Especially when the solution they propose patently cannot work.

          • uanime5
            Posted June 2, 2012 at 9:05 pm | Permalink

            If you had basic scientific knowledge you’d know the difference between weather and climate.

          • lifelogic
            Posted June 3, 2012 at 6:45 am | Permalink

            Climate is “average weather” as I keep saying – my point remains valid.

  2. Pete the Bike
    Posted June 1, 2012 at 6:23 am | Permalink

    The reason the bank hasn’t controlled inflation is that it never intended to. If it did intend to it would have raised interest rates long ago. What it has done is finance government spending by money printing and kept it’s interest payments just about affordable. The money printing erodes the value of sterling and inflates the debt away. Add in higher taxes as well.
    Great system except that it only really benefits the politicians and their favoured banks/ big business buddies whilst stealing from savers and productive people.
    That’s why we all feel poorer and the economy is going nowhere.

  3. David B
    Posted June 1, 2012 at 6:34 am | Permalink

    It all comes back to the belief in “no more boom and bust”

  4. Mike Stallard
    Posted June 1, 2012 at 6:47 am | Permalink

    Aren’t you putting the cart before the horse?

    Overtaxed, unemployed indebted people are not able to afford things any more so they go for the cheapest or do without. Prices have to come down. The centre of our town has become a desert of Poundland, Charity Shops and QD. My mice industry of coaching has all but dried up. People cannot afford the £25 an hour that the agency has always demanded.

    The response has been, so far, to increase the taxes, to keep the printing presses rolling and to make some resounding speeches.

    In other words, it isn’t the Bank’s fault. It isn’t in charge. It just reacts.

  5. Tad Davison
    Posted June 1, 2012 at 6:57 am | Permalink

    I pretty much agree, but Klugman might not, especially when it comes to shrinking the public sector. A poster on Doug Carswell’s site is quite taken with the opposite views which Klugman expressed on the BBC’s Newsnight programme, broadcast on Wednesday. I’m hoping he visits this site also to explain himself.

    Tad Davison

    Cambridge

    • lifelogic
      Posted June 1, 2012 at 12:50 pm | Permalink

      Klugman is in part quite right, but just in that lack of demand (and confidence) is the main current problem and we do not want all to cut back as it makes it even worse. Where he is wrong is in thinking that governments, doing, no doubt, their usual stupid, pointless and even damaging further tax, borrow and waste will help.

      We need a big private sector growth and big state sector contraction, fewer payments to the feckless, easy hire and fire, banks that work, cheap energy, lower taxes and a real pro business vision.

      We have none of this so far just the prospect of the Unison puppet soon. Moulton was, as usual, rather more in touch with the real world.

      • lifelogic
        Posted June 1, 2012 at 12:58 pm | Permalink

        Investment in school building, most infrastructure, education, HS2 (if you can call that an investment) and the likes are far to long term we need investment that make a fairly rapid return. Start with all the projects put on hold due to RBS (and all the banks) pulling cash back from countless sound business – as a good starting point.

        • Alan Wheatley
          Posted June 1, 2012 at 1:57 pm | Permalink

          The roll out of fibre broadband to the whole UK would make a difference quickly. There is nothing to learn, the technology is proven, it just needs the work doing to lay the cables.

          The fly in this ointment is that it requires effective government management, which so far is notably lacking. And you cannot simply leave it to the private sector because BT have a dominating monopoly ownership of the infrastructure.

          It would also be good politics because there would be no objectors and everyone wins. Even those few who already have fibre win because there will be many more people with who they can communicate in high quality.

        • Mike Stallard
          Posted June 1, 2012 at 4:05 pm | Permalink

          If Klugman (tr = “genius” from the German) was called Arthur Mee, if he shaved off his beard and lost about ten stone, took off his suit and tie and had not received the Nobel Prize, who would listen to him?

          Not Newsnight where I struggled to understand his point for about a ghastly hour.

  6. Colin D.
    Posted June 1, 2012 at 7:24 am | Permalink

    No mention of Quantitative Easing. Surely ‘printing money’ is devaluing the currency and either is, or soon will be, driving inflation.

    • Mike Stallard
      Posted June 1, 2012 at 4:09 pm | Permalink

      And what a quick way that would be to reduce public sector wages and pensions quite painlessly, to pop up prices and to keep the taxes at the same level, while, at the same time, stimulating exports and encouraging the tourist industry.

      It is just that we OAP savers would take the hit but – hey! – serves us right for being the selfish baby boomers! (This trick was reproduced copyright H Wilson)

  7. Brian Tomkinson
    Posted June 1, 2012 at 7:37 am | Permalink

    Haven’t you heard, John, inflation is what we all need according to those esteemed economists spouting regularly on the BBC? I remain of the view that this Conservative led coalition’s economic policy has always been based on tax increases and inflation and not the control of state spending we were promised by your party and for reneging on which they should never be forgiven.

  8. lojolondon
    Posted June 1, 2012 at 7:53 am | Permalink

    John, just a quick aside on the BBC assault on Jeremy Hunt.

    People have described it as an attack on the government, but it is really an anti-Tory witch-hunt.
    If the BBC/Guardian really feel Jeremy Hunt should resign for the PRINCIPLE of being pro-Murdoch when in change of the decision, then, logically and honestly, they would equally want Vincent Cable to resign for being anti-Murdoch when in charge of the decision.
    Clearly it is not the principle of failing to be impartial, but which side a person is partial on that decides his fate.
    In a week where Spain and the Euro are failing dismally, the subject does not even get a mention in the headlines, as the BBC covers the failings in Europe and pushes their own agenda as always.
    I have said before, the Guardian is a private company and obviously they can write whatever they like, but the BBC is a taxpayer funded organisation that fails to meet the basic objectives that it exists for, and failure of the Conservatives to take action on the bias of the media monopoly of the BBC will haunt you forever.

    • uanime5
      Posted June 1, 2012 at 9:20 pm | Permalink

      Given that Sky also didn’t mention Spain but chose to report on the Leveson inquiry and the Diamond Jubilee it seems the problems you mentioned aren’t just limited to the BBC.

      Also the BBC did mention the problems with Spain on their website:
      http://www.bbc.co.uk/news/world-europe-18277566

  9. lojolondon
    Posted June 1, 2012 at 7:56 am | Permalink

    Regarding your article – one more thing – King’s liking of QE – or ‘printing money’ is another major failure. First undertaken with the intention of rescuing G.Brown’s election prospects (remember he went into the last election claiming ‘the recession is over’), it has been a disaster, and terrible for savings and inflation.

  10. English Pensioner
    Posted June 1, 2012 at 8:34 am | Permalink

    The policy is decided by the “experts” of the MPC, and for some reason, the logic and thinking of these experts is totally different from that of most ordinary people. This is happening through a wide range of government activities, not just finance.

    Most of us who have given the financial situation a little thought reach the conclusion that “printing money” causes the value of money to depreciate which in turn causes the cost of imports to rise. As the country is now fuelled by foreign oil and gas, the price of which affects almost everything we touch, this must cause inflation.
    But for some reason, “experts” simply don’t see it this way – Perhaps they should all be sent for a spell in Zimbabwe!

  11. James Reade
    Posted June 1, 2012 at 8:40 am | Permalink

    If a body is able to do its job most of the time, we would probably agree it’s doing a good job?

    Between 1997 and 2007, inflation was never outside the target range – 10 years. Since then it’s struggled.

    But we are measuring an institution by how it manages to control something that isn’t directly controllable by anyone – so it’s a little bit odd to make such great hay when factors outside its remit mean its control over that thing is lessened.

    This statement of yours is particularly odd, John: “The Bank has argued that much of the inflation has been “imported” and so not so susceptible to control by changes in domestic interest rates. However, the period is characterised by a major devaluation of the pound”

    The definition of imported inflation is that it comes from abroad – hence via the exchange rate, and hence if that exchange rate depreciates (depreciates, John – it didn’t devalue since it wasn’t fixed), then, low and behold, we import inflation.

    And we’ve talked at length about that depreciation on this blog John, and you know full well it came long before anyone was talking about QE hence the supply of money. The depreciation was caused by a total absence of growth prospects in the UK economy, not because of monetary policy expectations.

    But if you do wish to keep making this statement, please at least do those of us who take the economy seriously a favour, and back up what you write with some serious invesitgative work. I’m talking data and regression methods. It’s quite easy to work out whether the money supply does directly affect the exchange rate, but I can tell you haven’t bothered to do that – just like you haven’t bothered to really investigate the impact of government spending and deficits on inflation and the exchange rate. Have you?

    • Alan Wheatley
      Posted June 1, 2012 at 2:08 pm | Permalink

      Imported inflation is not singularly caused by the exchange rate. The exchange rate can be unchanged but the cost of an overseas purchase can go up because the supplier has raised the price.

    • Caterpillar
      Posted June 1, 2012 at 3:01 pm | Permalink

      “But we are measuring an institution by how it manages to control something that isn’t directly controllable by anyone”

      I suspect ther might be two responses to this;

      (i) The BoE’s policies supposedly contribute (their own working paper no 443, Jan 2012), “three models suggest that QE may have had a … peak effect on annual CPI inflation of about 1¼ percentage points.” Well, without that inflation would have been lower and closer to target (the BoE target is not a domestic, constant tax target).

      (ii) If CPI inflation isn’t controllable through monetary policy then either the Chancellor should remove it from, and modify, the remit, or monetary policy decisions should come back inside Govt so appropriate debate on other effects is had (e.g. the redistribution of wealth from savers to mortgagors, as a redistribution issue ought to be politically debated as tax policy is).

  12. Caterpillar
    Posted June 1, 2012 at 8:51 am | Permalink

    (1) Weak currency, partly admitted bu BoE
    (2) US QE => dollar priced asset price speculation
    (3) Change of firms’ product mixes & models (from volume to margin) and targets (from profit & size to cash & survival).

    “The Bank in its defence is right to point out that the UK has not suffered a wage/price spiral in recent years,”

    The back is wrong here, this is not the relevant point. The point is the reinforcing loop between aggregate consumer demand and real wages set going by inflation, namely;

    inflation up -> real wages lower than other wise would have been->quantity demanded lower than other wise would have been ->(derived) labour demanded lower than other wise would have been -> real wages lower than other wise would have been

    For this to change requires either (i) the loop to be dominated by another or (ii) price inflation to lag wage inflation (one way or another).

    I worry that the weak GBP, high inflation route that the BoE/MPC has followed has pushed UK along the infaltion to stagflation to stagnation path.

  13. Matthew
    Posted June 1, 2012 at 8:52 am | Permalink

    Before the election I thought that an incoming Conservative government would get to grips with the deficit. It is in dealing with the deficit that the coalition parties appear most united.

    It is disappointing that progress has been so very slow – as the politicians continue to bribe us with borrowed money.

    Seems now that the government strategy is to deal with the debt by inflating it away. I don’t see much of a social contribution in that. We may as well as well be in the Euro.

    It’s only going to be beneficial to keep our own currency if the government take the right course.

  14. Captain Crunch
    Posted June 1, 2012 at 9:37 am | Permalink

    I doubt that the increase of VAT to 20% has helped.

  15. waramess
    Posted June 1, 2012 at 9:38 am | Permalink

    You are right : higher interest rates and smaller government would have done the trick, but we live with a Keynesian government and a Keynesian Central Bank, and they would not understand such things.

    They understand:f urther reducing interest rates, printing more money, and spending our way out of the recession.

    An exact mirror image, which might go some way to explaining the mess we are all in

    • sjb
      Posted June 1, 2012 at 12:57 pm | Permalink

      A Keynesian government might have started “shovel-ready” infrastructure projects in May 2010; other projects needing planning permission might well now be underway employing hundreds of thousands.

      • James Reade
        Posted June 1, 2012 at 1:44 pm | Permalink

        Spot on. People generally use the term “Keynesian” in an attempt to give their commentary some air of authority. It’s usually fun to press such folk into defining exactly what they mean by a “Keynesian government”. More interesting still is to think about what a Keynesian central bank is. Given the idea about central banks having independence came about mainly amongst academic economists in the late 1970s and 1980s, Keynes was long gone by then. Maybe he just means it was made independent by Labour?

  16. Denis Cooper
    Posted June 1, 2012 at 9:40 am | Permalink

    “Everyone agrees the main aim of Labour’s Bank of England was to get inflation down to 2% and keep it there.”

    But that “main aim” wasn’t chosen by the Bank; the principle of targeting domestic inflation was introduced by Norman Lamont in late 1992, after the ERM fiasco put an end to attempts to target the external exchange rate for sterling, and it was put on a statutory basis by Parliament through Section 11 of its Bank of England Act 1998:

    http://www.legislation.gov.uk/ukpga/1998/11/contents

    “In relation to monetary policy, the objectives of the Bank of England shall be –

    (a) to maintain price stability, and

    (b) subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment.”

    And unlike the ECB, which makes its own interpretation of “price stability”, the inflation target to be met by the Bank of England is that set by the Chancellor; as it is put in Section 12 of the Bank of England Act 1998:

    “The Treasury may by notice in writing to the Bank specify for the purposes of section 11 –

    (a) what price stability is to be taken to consist”.

    Initially Lamont’s target was to get RPI-X in the lower part of the range 1% to 4% by 1997, later that was modified to keep it at 2.5% or less.

    In 1997 Gordon Brown had the system put on a statutory basis which removed him from the process of deciding interest rates, changed to a symmetrical target range of 2.5% with a maximum deviation of 1.0% in either direction, and required the Governor of the Bank to write an Open Letter to him if RPI-X moved outside that 1.5% to 3.5% range.

    Then in December 2003 Brown changed his target to one expressed in terms of the EU’s CPI instead of RPI-X, CPI = 2.0% with a maximum allowable deviation of 1.0% in either direction.

    “Most also agree that the Bank has been singularly unsuccessful at doing so.”

    Well, no, the system actually worked well for a long time, as Andrew Lilico pointed out in this excellent article last August:

    http://blogs.telegraph.co.uk/finance/andrewlilico/100011243/failure-to-meet-the-inflation-target-has-been-the-fault-of-successive-chancellors-not-the-mpc/

    “In April 2007, for the first time in its fifteen year history, the UK missed its inflation target, with CPI inflation rising at 3.1 per cent. Mervyn King was forced to write a letter to Chancellor Brown explaining why.”

    So the system worked for fifteen years but has failed for five years; and Lilico’s complaint is that despite all the Open Letters which have been written, fourteen of them now, listed here:

    http://www.bankofengland.co.uk/monetarypolicy/Pages/inflation.aspx

    “there is no official admonishment of the Monetary Policy Committee”

    in any of the three Chancellors’ replies – not from Brown, or from Darling, or now from Osborne.

    In other words, over five years three Chancellors have been complicit in the failure of the Bank to perform its statutory duty of meeting the inflation target they set.

    • Lindsay McDougall
      Posted June 6, 2012 at 11:24 pm | Permalink

      The real problem was that CPI was the wrong inflation measure to target. Between 2001 and 2007 CPI was roughly on target but asset prices were rocketing.

  17. Gerry Dorrian
    Posted June 1, 2012 at 9:45 am | Permalink

    there were many people at the time who were saying that, yourself included, but the then-Government seemed secure in its belief that everything it did was for the best. Doctor Pangloss, anybody?

  18. Lindsay McDougall
    Posted June 1, 2012 at 11:01 am | Permalink

    Looser money does not ‘fight recession’ except in the first year. Thereafter, its effect on GDP growth is negative. In the mid-seventies, a period of very high inflation, we had one year of 5% GDP growth followed by 3 years of zero growth. In the late eighties / early nineties, we had inflation of 10% pa and we had one year of just below 5% growth followed by 3 years of low GDP growth. What was the rate of real GDP growth in the last few years of the Weimar Republic’s hyperinflation? What was the German rate of real GDP growth towards the end of Adolf Hitler’s time? What was the Zimbabwe rate of real GDP growth during their Mugabe induced hyperinflation? A BIG FAT NEGATIVE, that’s what.

    So how long are the Prime Minister and the Chancellor going to be allowed to spout this nonsense that an ultra-low base rate and above target inflation are good for us, without contradiction from their own back benchers?

    • James Reade
      Posted June 1, 2012 at 1:47 pm | Permalink

      That’s a remarkably bold claim, that expansionary monetary policy can only work in precisely the first year of a recession. More remarkable given your subsequent butchering of a subset of economic data. What about all the other countries over the years that have pursued loose monetary policy? Do they all stack up behind your initial bold statement?

      You might wish to also check out the info Denis Cooper posts above. Since 1997, the PM and Chancellor haven’t been setting interest rates.

      • Lindsay McDougall
        Posted June 3, 2012 at 1:49 pm | Permalink

        As I have stated many times on this site, the measure of inflation targeted should have included asset prices, particularly house prices. Had it done so, monetary policy would have been tighter between 2001 and 2007, the key period.

        Whatever the situation before May 2010, it is crystal clear that since then the ultra-low base rate and the high inflation rate are actively supported by the Prime Minister and Chancellor, if not ordered by them behind closed doors.

        Look at it logically. Why should additional money and a depreciating currency cause permanent real economic growth? What’s the mechanism? If these was one, do you not suppose that all governments would be inflating like mad? In fact, name me one developed country where high inflation has led to high economic growth over a long period of time.

        I lived through the mid-seventies. People were getting what looked like very good wage and salary increases, only to find that inflation was rising even faster. It caused massive civil strife.

        Finally, did I say ‘precisely’ the first year? That’s your word, not mine. In economics, most response times are approximate.

  19. BBCthink
    Posted June 1, 2012 at 11:11 am | Permalink

    Took a little peak at USGDP out yesterday and noticed government contribution had fallen for sixth quarter in a row. In the last two quarters, the fall in government spending has been 1% or more (federal reduction even more). By contrast, government in ‘austerity Britain’ continues to contribute to UKGDP quarter after quarter.

    As a true believer in the wonderful UK media, I am puzzled – I thought recession in the UK resulted from too little government spending and “US example” should be followed.

    • James Reade
      Posted June 1, 2012 at 1:50 pm | Permalink

      You fall into the same trap John regularly does – that of causality.

      US GDP is growing, therefore the state is falling as a proportion of a growing number.

      Here, we aren’t growing (many would argue due to this austerity you believe – emphasis on the word believe – to be expansionary), and as a result, the state is growing as it must pay benefits to the unemployed and other cyclical costs it is obliged to pay, while the number that we think of the state’s size in reference to, GDP, is not growing and in fact is shrinking.

      So, to sum up – you’ve more than likely got it all the wrong way around. The UK’s govt contribution to the economy is growing because the economy isn’t growing. Not the contrary, which is what you assert.

      Reply: Wonderful contorted logic. UK public spending is rising in cash and real terms. It is not just a cyclical effect as you wish to imply. Spending by US state governments is being cut. If you look at our past experiences of recovery, as in 1981-3 and in 1992-4, cutting public spending was one of the conditions for the growth that recommenced.

      • Steven Whitfield
        Posted June 2, 2012 at 12:35 pm | Permalink

        It seems that that the Uk is supposed to be in ‘austerity’ because spending is rising but not quite as quickly as it was a few years ago. Austerity seems to be a word like ‘poverty’ ..that has become totally divorced from it’s true meaning. The coalition’s grand plan..

        1. Create a bogus impression of ‘austerity’ and spending cuts by closing a few libraries.
        2. Spin the line that the coalitions ‘tough measures’ and are needed to reassure the bond markets and keep interest rates low.

        3. Disguise the fact that the Uk’s low rates are almost exclusively because of money printing and theft from the thrifty

        4. Quietly keep spending rising to placate vested interests and diffuse opposition chants of ‘same old tories’ etc.

        5. Back in power in 2015 by engineering another Liberal / Conservative government by hobbling the ‘right wing’ of the party.

        • Lindsay McDougall
          Posted June 3, 2012 at 2:29 pm | Permalink

          You are wrong about point 5. If the Conservative Party does not adopt a European policy that will make coalition with the LibDems after 2015 well nigh impossible, I won’t be voting for them. And I’m very far from being the only one. Mr Redwood and his Eurosceptic colleagues have everything to gain – and absolutely nothing to lose – by INSISTING that the Conservative Party adopt such policies.

      • Lindsay McDougall
        Posted June 3, 2012 at 2:24 pm | Permalink

        Indeed, Mr Redwood. Just to hammer the nail home, if you don’t have economic growth, you need to start cutting public expenditure hard. Without economic growth, plan B is tougher than plan A, not easier.

  20. Denis Cooper
    Posted June 1, 2012 at 11:42 am | Permalink

    I’d also like to refer again to the “Treasury’s reserve powers” under Section 19 of the Bank of England Act 1998, and ask why neither Darling nor Osborne have seen fit to invoke those powers.

    I find that Gordon Brown actually mentioned that he intended to include that kind of provision in his letter of May 6th 1997 to the then Governor of the Bank of England, Eddie George.

    “THE NEW MONETARY POLICY FRAMEWORK”

    http://www.bankofengland.co.uk/monetarypolicy/Documents/pdf/chancellorletter970506.pdf

    “6. The legislation will provide that if, in extreme economic circumstances, the national interest demands it, the Government will have the power to give instructions to the Bank on interest rates for a limited period. This power is in line with practice in other countries, and could only be exercised through subordinate legislation approved by Parliament.”

    It should be said that it is not in line with the would-be country known as Euroland, where the treaties do not provide for eurogroup leaders to have the power to give instructions to the ECB under any circumstances, and to the contrary explicitly forbid any attempts to do so, which is a major flaw in that system.

    My argument is that the honest approach, and the one which would have done most to limit reputational damage for both the Bank and the established system for controlling inflation, would have been for Darling to publicly state that the normal system was not able to cope with the current abnormal circumstances and was therefore being suspended, subject to approval by Parliament.

    • Alan Wheatley
      Posted June 1, 2012 at 2:30 pm | Permalink

      Yes, I agree with what you describe as the “honest approach”.

      My view is that Gordon Brown passed the responsibility for setting interest rates to the Bank as a way of getting out of having to take the responsibility himself. Since then it has become to be seen as “the” way to do things, with no thought as to what makes most sense in principle and in practice.

      I think Norman Lamont is honest in these things. He still seems pretty active, and surely the Chancellor could operate successfully from the Lords!

  21. Barbara
    Posted June 1, 2012 at 11:57 am | Permalink

    ‘The way to crush the bourgeoisie is to grind it between the millstones of taxation and inflation’ (V.I. Lenin).
    Conservative-led government doing the work of Lenin. Who would have thought it?

    • lojolondon
      Posted June 1, 2012 at 6:01 pm | Permalink

      GOOD quote!

    • APL
      Posted June 2, 2012 at 2:46 pm | Permalink

      Barbara: “Conservative-led government doing the work of Lenin. Who would have thought it?”

      Anyone who looks at their deeds rather than listens to their rhetoric.

  22. David Hope
    Posted June 1, 2012 at 12:15 pm | Permalink

    “The Bank has usually argued that the prospect is finely balanced between an overshoot and an undershoot. So far it has always overshot.”

    Imagine if there was an undershoot and prices went down. The horror! The terror! I don’t know how I’d cope if things stayed the same price or god forbid, went DOWN in price.

    I mean I absolutely hate it when smartphones get cheaper or computers, or flights or TVs. The world almost ends. It means that people just don’t buy anything ever and the economy stagnates. This is particular true in food which is why I am relieved it has not occurred. If that kept going down no one would buy anything for as long as the deflation lasted. People might go years not wanting to buy food because of the risk the price could go down further. People could DIE!!

    Seriously I am rather sick of the idea that inflation is generally good and deflation must be avoided at all costs. It’s clearly nonsense. A bit up or down we can get away with, the more stable the better generally but I see no reason why it needs to stay positive except to erode debt.

    • James Reade
      Posted June 1, 2012 at 1:54 pm | Permalink

      As with Libertarians, you deliberately blur the distinction between changes in the price of a good, and inflation. The two are completely separate concepts. One refers to demand and supply in a single market for a single good, the other refers to general demand and supply conditions in an entire economy for millions of different types of goods and customers. How can the two even be remotely similar to each other? Only an economist would try and make such an absurd simplification like that!

      • Lindsay McDougall
        Posted June 3, 2012 at 2:12 pm | Permalink

        Just to avoid an ‘absurd simplification’, a depreciating currency and higher import prices do not automatically lead to a general increase in prices. If the Bank of England refuses to relax monetary policy, then the rate of increase of domestically produced goods slows to compensate.

  23. Arunas
    Posted June 1, 2012 at 12:23 pm | Permalink

    “If the government did more deficit reduction by controlling costs in the public sector, and less by pushing up taxes and charges on the private sector, that too would cut the inflation rate.”

    Why doesn’t it then? Wasn’t it in the manisfesto – bonfire of quangos, efficiency savings and all? I voted for it, where is it? I feel cheated…

  24. Ted Greenhalgh
    Posted June 1, 2012 at 12:24 pm | Permalink

    How about a crack down on the black economy (how many billions in lost tax and VAT?) and then a drastic reduction in tax rates

  25. forthurst
    Posted June 1, 2012 at 1:20 pm | Permalink

    “The Bank in its defence is right to point out that the UK has not suffered a wage/price spiral in recent years”

    This has nothing to do with the BoE and everything to do with the clandestine policy of the Labour party and the brazenly open policy of the Conservative party to accede to the ‘demands’ of ‘business leaders’ to import deflationary human resources and those with no obvious use whilst putting English (as in England) people out of work. As a result, government spending continues to spiral out of control and demand in the private sector remains weak. This is completely unsustainable whether it has diminished inflation or not. This is not how responsible government should be conducted and is quite clearly treasonous.

  26. Alan Wheatley
    Posted June 1, 2012 at 1:41 pm | Permalink

    I note the BoE are trying the “imported” excuse. As someone who is affected by inflation I do not care where it comes from!

    Further I do not recall the BoE being directed that they did not need to take account of “imported” inflation.

    Steady Eddy managed without ignoring “imported” inflation. Was he just lucky, or are the present lot simply not up to the job?

    • Denis Cooper
      Posted June 2, 2012 at 11:46 am | Permalink

      I think that Eddie George was indeed lucky, as far as imported inflation was concerned, because the pound was trending upwards for the whole of his tenure.

      As it was for most of Mervyn King’s first term, as well, before it went into a quite sudden reverse.

      Taking numbers from here:

      http://www.bankofengland.co.uk/boeapps/iadb/fromshowcolumns.asp?Travel=NIxIRxSUx&FromSeries=1&ToSeries=50&DAT=RNG&FD=1&FM=Jan&FY=1963&TD=2&TM=Jun&TY=2012&VFD=Y&CSVF=TT&C=IIN&Filter=N&html.x=37&html.y=19

      On the day Eddie George became Governor, June 30th 1993, the sterling trade weighted index stood at 85.8994; there were of course ups and downs during his tenure but mainly ups, and on the day he retired, June 30th 2003, it stood at 97.0634, 13% higher.

      It carried on up to an over-valued all time high of 106.8045 on January 23rd 2007, and then slid to an under-valued all time low of 73.7560 on December 30th 2008; after which it recovered to stabilise around 80, 25% down from its peak; in the past few months it has moved up a bit, and on May 31st it was 83.0133.

      So it’s now not far off where it was 19 years ago when Eddie George became Governor, but during that period it appreciated by a quarter over the first 14 years before going into reverse.

      Reply: The Bank’s policies do of course have a big influence on the sterling rate.

      • Denis Cooper
        Posted June 3, 2012 at 8:17 am | Permalink

        They do, but the effects are complex and to a large extent indirect and they operate over various timescales.

  27. Bert Young
    Posted June 1, 2012 at 2:42 pm | Permalink

    My lesson in life is – “If you want to create change , start at the top”. There is a huge problem in the way UK Ltd is run at the moment , so , you know where I would start . The responses to this blog have been consistent in the criticisms of Cameron and Co and they should not be ignored . I sympathise with Dr. JR because his hands are tied within the political machinery of Whitehall , however , he is one of the few individuals who can engineer a movement to sort things out . Enough is enough , push the button , you will get the support needed .

  28. sc1
    Posted June 1, 2012 at 2:54 pm | Permalink

    ironic that we are trying to curb inflation whilst stealth taxes ratchet prices ever higher, how many people are now in fuel poverty thanks to green stealth taxes.

  29. Javelin
    Posted June 1, 2012 at 6:24 pm | Permalink

    The BofE is inflating debt away. QED

    Europe is looking like its really sliding into the abyss this weekend. I’m expecting a Spanish bailout to be announced shortly.

  30. Gary
    Posted June 1, 2012 at 7:41 pm | Permalink

    “If the bank had moved interest rates higher in 2005-6 it would have curbed the inflation that broke out, and would have restrained some of the excess credit creation that followed. If the government had not run such a large deficit before the recession boosted spending and cut taxes, that too would have helped keep price rises under control and would have given the state more flexibility in the downturn. If the government did more deficit reduction by controlling costs in the public sector, and less by pushing up taxes and charges on the private sector, that too would cut the inflation rate.”

    A lot of bureaucratic ifs there. Maybe just leave the banks to fail, have an almighty cleansing, painful as that will be, and start again ?

    Of course, they would rather rob us of every last penny before they let the banks take their medicine. So, stagnation and a slow grind into poverty it will be. The only consolation is that it took Japan 22 years and counting, we start with no savings and no trade surplus, we may hit rock bottom within a decade.

  31. uanime5
    Posted June 1, 2012 at 8:04 pm | Permalink

    There’s high inflation because it allows the Government to inflate their debts away. Inflation will continue as long as it benefits the Government.

    • Lindsay McDougall
      Posted June 3, 2012 at 2:05 pm | Permalink

      I never thought I’d find myself ageeing 100% with a uanime5 post. High inflation and low interest rates also protect people and companies holding a lot of property whose purchase was financed by debt.

      Won’t you now join me in my campaign for zero inflation?

  • 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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