I have long been predicting slumpflation. It was inevitable, given the wild fiscal policy and the manic monetary policy the government and Bank are following. Figures for the last quarter show that is exactly what we now have.
Manufacturing output is down a massive 13 % on a year ago. Why didn’t the authorities cut interest rates in 2007, when some of us urged them to do so, to cut the prospective decline in output in Q4 2008 and Q1 this year? The likely crash was obvious. Mr Blanchflower on the MPC foresaw it as well. Unemployment soared by 244,000 in the first quarter, and by 268,000 in the last three months.
Meanwhile, consumer price inflation as measured by the CPI, the government’s chosen measure and the one used for the Bank of England’s target, rose at a 2.9% annual rate last month. That is a massive 45% over target, and a high rate of inflation for a country experiencing a slump.
Why didn’t the MPC heed the inflation warnings some of us made in the second half of last year? Why didn’t they leave interest rates at say 2%, to offer savers some return and to send a signal they were not going soft on inflation and the value of the currency? Why didn’t they see that too large a devaluation would trigger further inflationary rises?
Has the MPC given up on watching inflation and trying to hit its target? Do they expect the slump to take care of all problems? Whilst most commentators expect price inflation to fall more in the next few months, we do not wish to see the seeds of the next inflation sown at the same time.
They should look at the recent performance of oil prices. They are today around 70% above their lows of earlier in the year. It looks as if the money from money printing on both sides of the Atlantic is finding its way into share prices and commodities.Some people call that inflation.
The authorities are getting themselves into the pickle of having no good choices left. If they are not careful we will end up with more of the same – slumpflation.