The government needs an MPC which gets it right. Unfortunately, for the last five years, the MPC has been well behind the plot, lurching from too easy to too tight to printing money.
Today their rationale for believing inflation is not a problem is that our economy enjoys a lot of unused capacity. So, they say, as more money finds its way into the system the UK can just produce more without prices going up. So why then are prices increasing by more than 5% a year (RPI)?
If you talk to manufacturers they will tell you that we now live in a global market. UK factories depend on a global supply chain. Raw materials shot up in price over the last year. Oil more than doubled from the bottom, metals like copper were also bid up rapidly. Now the surging demand in China, India and the rest of Asia, coupled with some recovery in the USA means a shortage of various components. There are price pressures within the global suplly chain. The UK does not have loads of spare factory capacity that it can bring on to insulate itself from these pressures. The long decline of the last decade meant many more closed foundries and factories. The recession also led to reductions of capacity, as firms were forced by a shortage of cash to close their produciton facilities. Many will not reopen.
At the same time the UK has experienced a big devaluation, in part brought on by the money printing in the latter stages of the last government. That too has served to raise industrial costs here at home.
Just as the good inflationary news comes in of a modest revaluation against the Euro countering some of the price increases, UK private sector wage increases start to rise from their very low levels during the recession. Inflation expectations are on the upwards march again. We need a more convincing account from the MPC of why they got it wrong over the recent past, and how they intend to stop inflation from here. Now the currency is beginning to help them they have a chance to break the cycle of rising expectations of more price increases to come.