Yesterday’s inflation figures make grim reading – even grimmer than many forecasters were expecting. We may have a few months more of dreadful inflation figures.
Readers of this blog will not be surprised. They will also know that I want the Bank and the government to start tackling slowdown and property crash, recognising that next year inflation will tumble anyway. They need to accept that they lost the battle against inflation for this year during the heayd days of their mistakes in 2005-6, apologise and try and get the next move right.
Fortunately, as predicted, commodity prices and energy prices have started to fall. We are already seeing sharp declines from the unacceptably high peaks on the forecourts for petrol and diesel. Price competition is intense, as supermarkets and large petrol retailers compete for the diminishing spending power of the customers. There could be further declines as the world economy slows and weakens under the impact of the Credit Crunch.
The masochists at the Bank of England want to make the crash worse by keeping rates high and even threatening higher rates. The government is making the crunch worse by its own profilgacy, pre-empting cash needed elsewhere and spending some of it on propping up a nationalised mortgage bank that is then not allowed to make new advances! Maybe the Bank does need to threaten higher interest artes to try to discipline the government. After all, the government has powered some of the borrowing excess with its off balance sheet adventures, its PFIs, PPPs and nationalised companies.
The dollar is now strengthening as the US current account improves and as US companies become more competitive. The European Central Bank will continue to keep rates too high for too long because it also made inflation mistakes in the miiddle of this decade and is sore about the current consequences.At some point they will have to cut rates to ease the pressures, and the Euro will cease to be so strong.
Governments and Central Banks have made a right mess of the last few years. They were too relaxed in the good times, misunderstanding just how much credit they had released and how long it took for that to cause inflaiton. Now they are too relaxed abnout the bad times, and seem unable to understand how deflationary the Credit Crunch will prove to be.