Plenty of inflation

As forecast here, UK inflation is high, rising and persistent, owing to the weakness of sterling. What will the Monetary Policy Committee tell us now? Why isn’t inflation subsiding already as they promised? Why is it so far over target? Was printing £200 billion extra cash to help the last government such a good idea?

We now learn officials were against some of the ways the last government decided to spend and spend in their last months. Money was only easy for them, thanks to QE. We need an explanation from the Bank of why they so readily assisted, and details of the heroic officials who tried to resist the spend and borrow plans of the dying days of the last administration.

We are learning the full price of all this as the weeks go by. Inflation is now 5.3% as measured by the RPI, at a time when wages are barely increasing. The squeeze is getting worse.


  1. Citizen Responsible
    May 19, 2010

    Too right! In the last 16 months that I have been following this blog, the warnings about QE and the risk of inflation have been loud, clear and consistent. Let the nation be in no doubt about what “Brown’s Legacy” has left us with.

  2. Colin D.
    May 19, 2010

    The MPC should be sacked. Their interest rate policies have cheated savers and rewarded debtors. If you are on moderate incomes it is not sensible to save anything – especially for retirement. You hardly hear of anyone speaking up for those who do 'the right thing' and are careful with money. The MPC never was 'independent'. They were just a convenient tool invented by Brown to facilitate his profligacy. Perhaps I am being uncharitable, but the expression 'useful idiots' comes to mind.

    1. A.Sedgwick
      May 19, 2010

      Quite – I am reminded of the unofficial Army guide to conscripts – four categories:

      1.Lazy idiots
      2.Hard working idiots
      3.Lazy geniuses
      4.Hard working geniuses

      The ones you have to worry about are 2 & 3.

      MPC – category 2?

    2. gac
      May 19, 2010

      Savers are certainly feeling the cost of this. My first ever PEP, converted to an ISA and renewed each year, has recently returned an annual interest of £12.80 on a lovingly protected balance for my old age of – £12,800.

      I have now spent it!

      1. BillyB
        May 20, 2010

        ISAs have been turned into an utter scam by the banksters, utterly defeating their purpose. I see no sign of the new regime doing anything to assist the prudent though. Or have I missed it? John?

        1. alan jutson
          May 20, 2010

          Billy B

          Absolutely agree with your comment on ISA's.

          Have been trying to transfer an ISA from a Spanish Bank to a UK one for the past 8 weeks (with 25 times the interest being offered) with absolutely no reponse, apology or excuse. Am now reporting this disgraceful service to the FSA and Banking Ombudsman.

          Will be removing all held funds, and closing all other accounts from this Bank in the coming weeks in protest, and at the same time will be writing to the CEO of that Bank to let him know why.

  3. Tired City Lawyer
    May 19, 2010

    Sadly the BoE was never truly independent partly because of the election it did not want to stop QE or increase
    interst rates as that would have prejudiced the election. The closest was when
    Eddie said cuts would have to be so severe it would
    make any government unelectable for many years.

    I feel that this was due to public bodies (incl the BoE) being sympathetic
    (Even biased) towards Browns neo-keynesian big government and big spending
    politics. I think we need a new guv for the BoE who is a fresh start
    and not tainted by new labour.

  4. Papasmurf
    May 19, 2010

    John, the AG should be on the case…..(words left out) Wholesale abuse of power and spending of Public Money when against official accounting advice especially when the outgoing government KNEW of the state of the public finances can only be described as (outrageous-ed)

  5. oldrightie
    May 19, 2010

    "Was printing £200 billion extra cash to help the last government such a good idea?"

    For Labour, these IOUs were just to stave off the bad news until post election. Fraud on a massive scale but presumably under Parliamentary privilege.

  6. English John
    May 19, 2010

    Pity Bliar revoked the death penalty for treason. Or did he see this coming. Brown, Darling, Mandelson, all spent money in a most irresponsible fashion. Obviously their required reading was Mugabe's 'How to run a country'

  7. Julian
    May 19, 2010

    Isn't QE devaluation in disguise?

    1. Michael Lewis
      May 19, 2010

      It is really a disguise. Its theft from the savers of this country.

    2. FaustiesBlog
      May 19, 2010

      … and taxation in disguise.

  8. Mike Stallard
    May 19, 2010

    I am so glad that the Civil Service did question the scorched earth policy. I didn't think they had it in them!

  9. Alexander
    May 19, 2010

    I agree with the article.

    I also believe we (the people) should prosecute Gordon Brown and those ministers for (their financial management).
    Reply: Spending and borrowing too much is not a criminal offence.

    1. alan jutson
      May 20, 2010

      John being a director of a Limited Company that trades knowing it is insolvent is a crime.

      Whilst I understand that UK PLC is not a Company and it does not have Directors, it does have a de facto controlling CEO and directors in all but name.

      Shame its not close enough.

  10. Ian Jones
    May 19, 2010

    The MPC is sat in a room crossing its fingers and hoping it hasnt just released the monster of inflation with their experiment of QE. Their credibility is quickly being lost and another 3 months of rising inflation would mean it is totally lost and the Govt will have to bring interest rates back in house.

    Although it is interesting that the current economic experiment may force economic historians to re-write the history books on how they should have dealt with the depression in the 30's. It might come to pass that the Keynesian view of Govt spending and printing money results in exactly the same outcome, their policy simply delays it.

  11. JohnRS
    May 19, 2010

    This must be producing quite a few red faces in the Bank. So I suspect the answers to your questions wont be released easily, it'll probably take an FOI query or two to shake things loose.

    1. FaustiesBlog
      May 19, 2010

      Is the BoE subject to FOI? I doubt it, because it is not a government institution. It is a private bank.

      1. Mark
        May 19, 2010

        For 140 years, by law, it had to publish its balance sheet weekly. Labour exempted it from that.

  12. Brian Tomkinson
    May 19, 2010

    We were told initially that QE was necessary to prevent deflation. I think it was done to allow Brown to carry on spending (wasting) money we didn't have before he had to have an election. At the same time it has been argued ad nauseam on these blogs that this and other actions would stoke up inflation. The pretence was maintained that keeping inflation at the target of 2% as measured by the CPI was the government's objective. I don't believe it ever was and certainly the lack of action to deal with it has resulted in more meaningless letters from the Governor to the Chancellor. I hope some better discipline is evident before things get even worse.

  13. michael read
    May 19, 2010

    So if inflation is raging why is the BoE not stepping in with a hike in rates?

    Easy that one. Osborne knows just as Darling did that inflation is a handy way of paying down the nation's debt.

    Screws the punters but when did they ever figure in the equation.

    1. Michael Lewis
      May 19, 2010

      The logical conclusion to that is – gilt strike, have the acutions being going away ok, due to QE? And sterling to collapse still further.

  14. David
    May 19, 2010

    History will show that the MPC was a New Labour proxy; it was all about making (borrowed) money cheaper for people, to fuel the housing bubble and crank up the banks' mad lending policies.

    I see Brown's first act – to remove the BoE from UK bank regulation, and created the MPC – as his worst and most reckless. We simply would not be where we are now, with a massive bank collapse and monster debts, if all this had been under the control of someone who was democratically elected.

    Put simply, they'd be too bloody terrified of letting the train runaway to have permitted the madness of the 2000-2007 tax, borrowing and spend fest.

    1. Robert Eve
      May 19, 2010

      Spot on!

    2. BillyB
      May 19, 2010

      didn't many Tories actually approve of this move at the time?

      1. Stuart Fairney
        May 19, 2010

        Indeed they did, but no libertarians were guilty of this. We believe the state should no more set the price of money than it should set the price of beans!

        Really, seriously, why let the state decide how much your money costs? It is patently absurd.

  15. waramess
    May 19, 2010

    The devaluation of sterling might have caused some prices to rise but it certainly has not caused inflation.

    Devaluation will however have caused us to redistribute our income in favour of necessities, such as fuel and reduced our spending on other goods.

    The idea that devaluation has a beneficial effect of depressing spending and increasing exports is now fatally flawed since our exports are now fast becoming an insignificant part of our economy and a reduction in spending will move us that little bit closer to a recession.

    Devaluation hurts us all, except the government, and the only way forward will be the eventual elimination of politicians and central banks from the management of our money supply.

  16. GJ Wyatt
    May 19, 2010

    If only the deserved obloquy for Labour's scorched earth actions can be made to stick in the public's mind. This is how they are. Just as it was in year zero (1997) when they scoffed and scorned at the golden legacy left them by Major and Clarke — Darling disingenuously says "every new government tries blaming the last one."

    The "letters of direction" must be just the tip of the iceberg. Labour ministers will have backed off from many last chance schemes to squander public funds when civil servants simply asked for written instruction. And other such schemes will have crept under the bar in the face of merely raised eyebrows, not serious enough to raise career-threatening objections. And some departments may even have had pliant officials condoning the waste. They should not get preferment.

    The public accounts committee should get onto it.

  17. lola
    May 19, 2010

    'Malfeasance in Public Office'. Can't we issue a few nice juicy arrest warrants?

  18. Frugal Dougal
    May 19, 2010

    I agree that we need details of the "heroic officials" who were unhappy with government directives. But more than this, we need an investigation into who made what decision and why, with the possibility of (further action being taken -ed).

  19. Mark
    May 19, 2010

    I'm sure you won't mind a repetition of the numbers:

    RPI month-on-month is 12.0% annualised, 10.3% over the past 2 months and 9.3% over the past quarter.

    Even the understated CPI shows month-on-month at 7.7% annualised, 7.1% over 2 months, and 6.6% over the past quarter.

    The disconnect between RPI and CPI is also fast becoming an issue: it seems to be increasing rapidly. Various measures suggest that house prices have risen about 10% over the past year – another damaging inflation.

    Earnings growth is around two percent, so living standards are already being squeezed before any further rise in taxes.

  20. Nick Drew
    May 19, 2010

    It's always the same for the middle classes –

    Pay Up! Pay Up! and Pay again!

    1. APL
      May 20, 2010

      Nick Drew: "It’s always the same for the middle classes – "

      Present company excepted. This is the opportunity for the luvy duvy set to actually pay some more tax!

      Because that is all inflation is, the original government stealth tax.

      By the way, given that we are an import economy, what we are seeing in inflation is really the result of the depreciation of Sterling. That is due largly to the reckless government spending.

  21. Steven Fitchett
    May 19, 2010

    This is really unacceptable. There should be FOI requests on this.

  22. Tony Wood
    May 19, 2010


    We should all be concerned about inflation and the real risk of hyper-inflation as governments continue to print money like mad, debasing their fiat currencies. I have found the analysis by these people admirably clear, persuasive and chilling – hopefully it is in order to provide the reference:

    Is it too late to save the ship? How can we keep afloat in a sea of worthless paper money?

  23. Joe
    May 19, 2010

    Mr Redwood,

    Surely you don't feel comfortable as a member of the Con-Dem alliance? Isn't it time that you and other like-minded conservatives made a stand against the left-wing leadership of your now liberal party. Do you not have a moral duty to represent the views of the many social and moral conservatives who have now been disenfranchised?

    Regards, Joe

    1. Robert George
      May 19, 2010

      No it is not time to do so. I too would have preferred to see a much stricter and more rightwing view taken of economic affairs and I cannot for the life of me see Why Osborne cannot stand up and make a clear statement of intent with respect to his mini budget. He does not need to announce details, just the governments absolute intention to take the many necessary and painful decisions which will be required. Mr Osborne may well find that the markets do not wait for Chancellors.

      However, this is most definitely not the time for rebellions and "making stands" This is a national crisis and one which is almost certainly worse than we have been told. For the time being we absolutely must forgo recriminations and put the National Interest first, second and last.

      Moral rightiousness in our current dire circumstances might be tempting but would be contemptably irresponsible.

    2. Norman
      May 19, 2010

      One of two things will happen:

      Things will go swimmingly and we'll discover that progressive liberalism is, in fact (and despite every other country which has tried it ending in failure), a success and Mr Cameron et al will see us through to prosperity.

      Things will go less than swimmingly at which point we will have to somehow find the backbone to introduce traditional growth policies or, failing that, call in the IMF to do it for us.

      Mr Redwood (or any other MP) leading a charge of a dozen MP's from the backbenches will just further demonise the right with the stigma of being the ones who weakened the coalition in Britain's hour of need.

  24. Andrew Gately
    May 19, 2010

    I would remove Mervyn King from the Bank of England, his failure to keep the UK markets liquid caused the run on Northern Rock.

    He then waited a further seven months before bringing in the special liquidity scheme.

    A further six months passed and he was concerned with fighting inflation.

    Only then when the banks were about to shut their cashlines did he inject the extra liquidity into the market.

  25. Sally C.
    May 19, 2010

    Couldn't agree more with this comment 'We need an explanation from the Bank of why they so readily assisted, and details of the heroic officials who tried to resist the spend and borrow plans of the dying days of the last administration.'
    (I also obviously agree with all the other comments here today.)

    But JR, will Mervyn King ever be held to account? If fired, will he just end up in the House of Lords along with Gorbals Mick (Martin)? In the end, he will still walk away with his huge pension pot.

    Meanwhile, savers and people on fixed incomes are being royally shafted. Our purchasing power has been shot to pieces by savings rates that are criminally low because the banks don't want to borrow from us when they can borrow so much more cheaply from the B of E and the interbank market.

    On top of that we have seen the pound devalue by 25% plus against the US Dollar and more like 40% against many other currencies. The only saving grace for holidaymakers in Europe this year is that the governments of the Eurozone are shooting themselves and the Euro in the foot faster than the previous government and the B of E can devalue Sterling.

    I completely understand why the new Conservative government would like interest rates to be kept low. When the cost of servicing the National Debt is already so high, every little helps, as they say. But the risk is that consumers who are already overindebted will gradually take on more debt.

    According to a Money Supply blog in the, the Swedish Riksbank governor, Stefan Ingves, is very concerned about the effect on consumer indebtedness of keeping interest rates at a record low of .25%. The Money Supply blog says 'Low rates have encouraged a surge in mortgage lending that has pushed Swedish household debt towards 80 per cent of gross domestic product, double where it was in the 1990s. “That can’t go on forever,” Mr Ingves told the FT.' Quite. Given that our household debt is estimated to be close to 100% of GDP, the concern has to be that the result of not acting in response to these continuing inflation figures could be an even greater private sector debt problem further down the road.

  26. Vanessa
    May 19, 2010

    What is laughable is that if I was printing money in my garden shed I would be up before a judge before you could say "quantitative easing"! But if an irresponsible government with most members with their noses in our trough does it, it is OK and above board!

    1. Stuart Fairney
      May 19, 2010

      Exactly. The same law must apply to citizen and state or it becomes de facto rule by fiat. If you do something that is deemed a crime, it must be a crime if the government does likewise.

  27. Martin
    May 19, 2010

    The keynesian model of reflating an economy by increased public spending recirculating around the economy makes very little sense these days. For every pound spent in consumption a large proportion of it flows straight out of the country to pay for imported goods and services so it never "multiplys" as it recircculates around the economy.

    80 years ago UK consumption was satisfied largely by goods and services produced domestically, so money did tend to stay in the economy for longer and the Keynsian theory was more valid in those days.

    Why the Conservatives did not take Gordon Brown to task and allowed him to take the high ground of how he "knew about the economy" I really can't understand.

    1. Jamess
      May 19, 2010

      Probably because Cameron doesn't understand the economy but thinks he does and thinks like Brown.

      I hope John Redwood helps his colleagues to see some sense with the economy. Ideally (it seems to me) we should use lots of different currencies (very easy since most people use cards to pay for things) so that if any one currency starts printing money like the last government did, savers could swap their money for sound money.

    2. BillyB
      May 20, 2010

      I thought the Keynesian idea was for public spending on *infrastructure* projects of long-lasting benefit to the country… not pouring it away as fast as possible in any direction.

      Where are our new roads, railways, high-speed internet links etc etc ?

      I'd feel a lot better about the deficit if it had been usefully spent.

  28. Kevin Peat
    May 19, 2010

    For the productive classes things do not augur well – a policy shift away from the promised repeal of the Human Rights Act, immigration and welfare reform, to a belief in taxation. This must surely be a recipy for both poverty AND societal decay.

    The fact remains that the Parliamentary expenses scandals and the excesses of the banking sector have still not been addressed, so expect militancy from the most unlikely quarters (BA as an example of unexpected middle-class militancy is just the start) I include the rank-and-file members of the security services in this. Why should we do as you (the political class) say and not as you do ?

    You simply MUST give us hope that our society can be repaired and preserved if we are to go along with the austerity measures without resistance. That there is going to be some gain for all of the pain.

    The reneging of election promises by David Cameron is a very bad start indeed and I fear that we are going to see an awful lot of essential skills and private wealth leaving this country as a result of lost faith.

    1. Mike Stallard
      May 20, 2010

      …..and what will Brussels, Paris and Berlin have to say about all that? Or, maybe, they really do want the very best for us – at their expense?

      1. Kevin Peat
        May 20, 2010

        Around 11 million people voted for a Tory Party manifesto of which those were flagship promises – that was barely three weeks ago.

        I'm sure that David Cameron had considered what Brussels, Paris and Berlin thought of it then. Would he have stuck to those promises had he won a convincing majority ? I'm not so sure now. Especially how all of the concessions appear to be going to the Liberals – despite them being well outnumbered by Tories.

  29. Neil Craig
    May 19, 2010

    The Labour government's decision to sign all the cotracts & spend the last penny before the election is unconscionable.

    It is a strong argument for us having a written constitutionn including within it the Balanced Budget Amendmet that, during the Reagan era, the Americans considered but didn't get through Congress. That would have made such contracts ultra vires. It is more important that government be restrained by the rule of law than that even the likes of Fred West are.

  30. S Matthews
    May 19, 2010

    I suggest we wait until the spending cuts are made before worrying too much about runaway inflation.

  31. Neil McEvoy
    May 19, 2010

    A few comments imply that Brown followed a Keynesian policy. That is to malign Lord Keynes. Keynes suggested a government should save in the good times in order to spare the populace during the bad. That was hardly original, having been the advice of Pharaoh's chief minister Joseph. At all events, it is a policy, otherwise known as "prudence", that Brown jettisoned some time around 1999.

    1. Martin
      May 19, 2010

      Actually Brown had a "Spend, Spend, Spend" policy. No matter what the ailment, the solution was always to spend more public money on it and he continually took the moral high ground of saying it was the best and most responsible thing to do and noone ever challenged him over it.

      The truth is that Cameron was scared to challenge him on it because the electorate via the opinion polls took fear at the very mention of any cuts and so Brown was able to carry on making a case that cuts would be bad for the economy now on the ridiculous premise that spending cuts were optional. All those ridiculous debates about the impact of a relatively small £6bn cut and he also remained unchallenged after very publicly telling Mrs Duffy about his 4 year plan to halve the "deficit" as though that would be a solution.

      It's not that Brown actually followed a true Keynsian policy but I believe that he certain sought vindincation for his actions amongst economists from Keynesian theory. I stand by my assertion that IMO unilateral Keynsian policys by any individual country is pretty much doomed to failure in the modern global economy.

  32. Acorn
    May 19, 2010

    It is worth having a read of the BoE Inflation Report. Particularly the part on "output and supply".… .

    Printing money is the basis for inflation, but is not the full Monty. The output gap; that is, the engine of the economy running at less that full throttle, is the Keynesian myth that is supposed to keep prices down. Suppliers are desperate to sell there goods at any price. It quite often turns out that this output gap is a myth as well. Some of the supply side of the economy has just given up and left the party during the recession.

    When you slam the pedal to the metal, that spare supply side capacity in the engine, is missing. That is when prices rocket; lots of demand and reduced supply. That is when we start queueing at the bread counter. Oh; and we start trying to remember the name of that African country where the supply side collapsed. Zim; err; Zimba something.

    1. Ian Jones
      May 20, 2010

      Too right, the so called output gap is no different to the Keynesian theories in the 70's. Even if there is a gap, if your inward costs are rising you still need to raise prices or make a loss. We are importing inflation which means to have 2% inflation, domestic prices must be in deflation!

      Its the opposite effect of what has happened for the last 10 years resulting in a massive overshoot in money supply.

      they will abandon the inflation target in the next 12 months.

  33. Mark
    May 19, 2010

    It has been reported that the Chancellor has asked the Governor of the BoE to consider how house prices might be included in the CPI measure that is used to evaluate inflation for interest rate policy purposes. Of course, CPI is supposed to follow an international standard, and therefore can't be changed in this way.

    To include house prices at this juncture in the inflation policy measure would be to shut the stable door long after the horse has bolted. Give or take the final hurrah house prices will soon recommence a downward adjustment in real terms that would hide the true level of inflation. Whilst house prices need to be considered (I am no fan of the Greenspan theory of clean up the mess afterwards – it has nearly destroyed the whole brewery), and interest policy devised to influence them, I now believe we need to re-cast the interest benchmarking system. Bank Rate needs to be re-named, and amended so that it no longer acts as the benchmark for mortgage rates. Instead, we need a much longer term policy rate. The extreme yield curve is storing problems that will be exaggerated by higher inflation – not least for gilts.

  34. Lindsay McDougall
    May 19, 2010

    Isn't it about time that the Govenor of the Bank of England is told to stick to the knitting and not bother himself about growth and fiscal policy:

    (1) Why is CPI inflation 3.7% instead of 2.0%?
    (2) Why have you not recommended a better inflation target for controlling money supply, one that includes house prices and other asset prices? House price inflation is not collateral damage, it is part of the picture.
    (3) Why are you still using an economic model that is forecasting 3.5% GDP growth? The inflation forecast that goes with it may be wrong too.

  35. NickW
    May 19, 2010

    Mervyn King suggests that inflation will subside as a result of all that spare capacity in the economy.

    My real life experience is that the capacity has gone.

    Every significant purchase I have tried to make in the last year has been bedevilled by lack of availability and long delays.

  36. ps
    May 20, 2010

    Are the Monetary Policy Committee being incompetent or dishonest when they claim to have a 2 % inflation target and consistently miss the target by miles?

    The Conservative/Liberal coalitions chief selling point to the electorate is that they believe in integrity/trust/honesty/fairness/hope.

    Whilst the MPC continues to fail to reach this target and seems to care very little about this failure they are badly undermining the goodwill that the coalition has been given and has generated by moving to expose & stop Brown/Labour dangerous policies.

    If they continue to fail in their objective the members should be replaced before it is impossible for the UK to get out of the huge pit that the MPC have happily dug under Brown.

  37. Robert K, Oxford
    May 20, 2010

    The price of gold since mid-2007 tells a pretty clear story about inflationary pressures and the potential collapse of fiat currencies.

  38. Richard NGN
    May 21, 2010

    Completely agree.

    How did they have the bare face cheek to tell us that printing £200,000,000,000 from thin air was the right thing to do. How did that work out for the last people to try it… Germany in the 1930's? or Zimbabwe?

    And now the same officals calim there is no connection to inflation.

    If the media focused less on celebrity haircuts and more on real journalism, maybe officials would think twice about taking us for utter mugs.

  39. Bruce
    May 21, 2010

    Completely agree.

    How did they have the bare face cheek to tell us that printing £200,000,000,000 from thin air was the right thing to do. How did that work out for the last people to try it… Germany in the 1930's? or Zimbabwe?

    And now the same officals calim there is no connection to inflation.

    If the media focused less on celebrity haircuts and more on real journalism, maybe officials would think twice about taking us for utter mugs.

  40. Oliver jones
    May 30, 2010

    Totally agree. The printing of the extra money was never going to take away the problem. Lets see how the tories handle this one. Nice article.

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