I understand why many of you are worried by inflation – food prices are leaping up, and the government has just increased the price of petrol sharply through the duty increase and the ad valorem tax increase on the back of the increase in oil prices. It is quite likely our inflation rate on the government/Bank’s measure of CPI will go back above the target of 2% in the next couple of months. If you add mortages in to the full RPI the figure is much worse, given the rate rises we have experienced. There is a real squeeze on disposable income. People may try to have a good Christmas and New Year at the shops, but that will just lead to slower sales thereafter.
The Bank, the MPC and the government should be focusing on the medium term picture – there is nothing they can do to stop the food price inflation in the pipeline, and they seem unwilling to solve the petrol inflation problem by cutting the tax rate as they want to pocket the extra money. I remain of the view that inflation is not the problem over the next couple of years – the problem is deflation from the credit crunch.
We now see that UK commercial property prices have fallen and may well fall more. Experts are arguing over whether they have fallen a few percent or whether it is already by more than 10% in many districts. Residential property prices are falling in most parts of the country outside the expensive districts of central London, where foreign demand seems to be keeping the market lively and detached from the rest of the country.
For the first time for several years the government is keeping public sector wage increases down – save for the top officials and managers who escape the squeeze. THere is no sign of a priivate sector wage lift off either.
Evidence is coming in from the banks that they now want to show more cash on their balance sheets, and are far more reluctant to lend. This will have an impact on retail spending patterns as people find it more difficult to obtain unsecured loans. The slow down in the volume of housing transactions will also reduce spending, as substantial big ticket and housing related expenditure occurs when people move, when a larger mortgage helps.
Keeping the pound high against the dollar by keeping money markets tight is extering downward pressure on manufacturers’ selling prices as they have to try to stay competitive against US exporters.
The Bankl and the MPC should not be misled by short term strength in inflation into making the credit crunch worse. If the government wanted to help they should cut the tax rate on petrol now, to control the short term increase in the CPI. Then the Bank could cut interest rates, lwoering RPI inlfaiton in the process and starting to relax the squeeze.
The authorities have to decide how far they want property and other asset prices to fall before they think they have done enough to make their point. If I were them I would not leave it too late. The US faces a bigger inflation threat than we do owing to the big fall in the dollar, but they decided on two cuts in interest rates to try to stop their residential property price collapse spreading and worsening, with the risk that it could tip the whole economy into recession if the authorities stood idly by.