After the Coaliton government formed and made clear its intention to cut the deficit further and faster, the pound has risen. This will start to cut the high inflation rate the old policy of devalue, print and borrow was bringing about. The main inflationary force was the falling pound.
It is true there remain two other inflationary forces at large. Rising taxes will add again to price rises when the new VAT rate comes in – but we did have the same effect this year which is already in the figures. There is also some inflation developing in manufacturing, as the world’s supply lines and capacities are already stretched a bit by the surge in Asian activity over the last year. It is now in many areas a global market.
I do not recommend any more quantitative easing as some of you seem to think I want. I criticsed the way they did that last time and forecast it would lead to a weaker pound and faster inflation. I do want functioning banks that lend to smaller borrowers on the High Street. The international regulators have started to back off, as I hoped. They do seem to be realising that demanding more cash and capital too soon will prevent decent recovery and impede the restoration of bank balance sheets as well.
Boom and bust are largely manufactured by governments and monetary authorities. The last boom was made from lax cash and capital rules and easy money policies. The last bust was made from too sharp a tightening of money markets and expecting too rapid an improvement of bank balance sheets after the excesses. Now we need to get it right to have the right pace of recovery. That requires the authorities to move on from austerity mode, but not to pump up more devaluation and inflation from simply printing public sector money and spending it on more quangos and CEOs.