December’s inflation figure was as bad as I feared – and that’s before the force of higher VAT kicks in in January.
The Consumer Price Index, the government’s preferred measure, rose by 2.9%, just a whisker below the level where the Bank of England has to write a letter of apology and explanation to the Chancellor. The Retail Price Index (including mortgages) rose to 2.4%, whilst the RPI excluding housing hit an alarming 3.8%.
The Monetary Policy Committee has a lot of explaining to do. Why were they still worrying about falling prices during 2009 when they were helping unleash this fast rise in prices? Why couldn’t they see the impact of the devaluation of sterling on prices, and the impact of easy money on asset and commodity prices?
As I feared, they have lurched too far again for the third time. Between 2005 and 2007 they kept rates too low, encouraged easy credit and set up the loan bubble. Between 2007 and the end of 2008 they set rates which were too high, presided over a massive contraction of credit and helped bring the economy from boom to bust. Now in 2009-10 they have again set rates that are too low and backed them up with massive quantitative easing. No wonder inflation has gone up.
Their defence will be twofold. They say inflation will come down again after a further rise in the first quarter of this year. That is likely to be true unless there is another devaluation and a further difficult surge in the price of commodities and fuel. They argue that without their expansionary action there could have been a worse recession.
They still need to explain why the UK has been the slowest of the major economies out of recession, given the huge monetary stiumulus. They also need to explain why they did not concentrate on inflation, as they have got it wrong one way or another throughout the last four years. It was easy to see it was going to lift off, yet they took no action to stop it. Maybe the decisions to slash rates and print money owed much to the government. Maybe the MPC felt they could not get in the way of a government determined to borrow lots of money at very low interest rates prior to an election. Perhaps they think our current inflation is a price worth paying for harmony with the Treasury and Number 10.