Yesterday’s figures for CPI price rises should have been no surprise to all those who have been following the fall and rise of the pound, quantitative easing, and UK tax policy. The distinctive policy being followed by the UK compared to most other advanced countries was always likely to produce higher inflation this summer, and has done so. Indeed, it may even be the government’s intention.
In most advanced countries including the USA prices are falling. Here they have been going up for three main reasons. The first is we are still experiencing the impact of last year’s large devaluation of the pound. We import a high proportion of our needs. It was always going to take time for the impact to come through, as suppliers ran out of more cheaply priced stocks, and as currency cover they had taken out expired.
The second is the cost of government. The UK government is on a run to get its own fees, charges and prices up. There has been no let up in the rise of Council Tax, parking charges and the like. The government is also hiking petrol and diesel tax, which will have a further effect on prices generally, as most goods in the UK are distributed by road transport.
The third is the rise of global commodity prices. This has been brought about by a combination of Chinese re stocking whilst prices are comparatively low, and speculative demand from the US and UK where quantitative easing has created more money amongst investors seeking some risky investments. Commodities have attracted some of this money.
The Bank of England thinks CPI inflation will now take a tumble. Their recent reports have not concentrated fully on price inflation in the way the rules suggest they should. The government seems to favour quantitative easing to try to increase output and speed recovery. It now needs to explain why output has increased in Japan, Germany and France in the last quarter but fell in the UK. Have they noticed that France and Germany had no quantitative easing?
It is quite possible that CI inflation will come down a bit sometime this year, but the Bank should be more worried about future inflation prospects than it is. If the government is trying to create a little bit of inflation for fear of deflation, it should recognise that it is all too easy for a little bit to become a big bit. They should be disturbed about the different path of both output and prices in the UK to other advanced economies. The one thing that is stopping fast inflation in the UK is the poor state of the banks. Sorting out the banks more quickly might be a better policy to get things working again.