Is the Bank of England about to get inflation right?

Since 2005 I have been ever ready to criticise the Bank for helping the roller coaster ride we have experienced. I disliked their super lax monetary policy up to 2007 which helped pump up the bubble and brought on inflation, warned against their super tight bust the banks policy in 2007-8, and expressed concerns about their bring inflation on policy of 2009-10.

Today I find myself in agreement with them, that inflation this year will fall. This month the VAT rises drop out of the figures. We have had a relatively stable year for the value of the pound, which will help. The pressures from commodity prices have subsided for a bit. There is cut throat competition on the High Street, with poor footfall figures so far this year. We should expect more price discounting to attract customers back. The advancing internet captures more sales by offering better value and clearer price comparisons. It’s another force for lower inflation.

The tight squeeze on living standards brought on by rapid inflation, low wage increases, and substantial tax increases, has driven more people to shop for the cheaper brands and the better value goods. The discount stores are thriving whilst many of the higher priced stores are struggling.

I do not expect the government to add to inflation again by further VAT or sales tax rises. They may continue the long term trend of faster inflation for public services than for private sector offerings. The large rail fare rises this January may well be repeated next year, as there is little sign of the railways getting more efficient or learning how to fill all those little used early and off peak trains that I seem to encounter when using the network. Many a quango or government department likes to put up licence fees and charges rather than controlling costs, and will doubtless do more of that this year. Councils reckon taking more money off us in parking charges and other fees is now the easiest way to bring down their deficits. So we cannot say the public sector will now be angelic when it comes to inflation, but no more VAT rises will help, after two years in a row of Labour and Coalition VAT increases.

We do need to recognise that China is now allowing its currency to rise a bit, and still has some inflation in its system. We must factor in some price increases affecting some of those very good value goods we see in so many shops with “Made in China” on the packaging. There is always the danger that the pound could fall again, as there is going to be no shortage of pounds given the policy of quantitative easing. However, there is now a race to the bottom, with many other countries trying to engineer devaluations which limits the scope for a large fall in sterling. Recent weeks have seen the pound go up against the ill fated Euro, though not against the dollar.

I do not expect to see much price cutting by manufacturing companies. They are enjoying the lower pound, and wanting to make better margins as a result. There is less spare capacity in the system than some at the Bank think. Manufacturers are reluctant to put in additional capacity, as they are concerned about Eurozone recession and poor demand elsehwere over the next year or so.

I do not expect quantitaive easing to have much impact on inflation this year. Two large banks are still weak and with the others are under a regulatory cosh. The commercial banks are unlikely to be able to gear up their balance sheets on the back of the cheap newly printed money. QE seems to be more a device to try to keep gilt rates down so the government’s large borrowings can be accommodated. The recovery needs more private sector bank lending to worthwhile projects. That still awaits reform of the state owned banks, a task not yet given to the Old Lady of Threadneedle Street.

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  1. Mike Stallard
    Posted January 4, 2012 at 7:14 am | Permalink

    It is good to see someone as keyed in as yourself so very optimistic. It really does make a change.

    It reminds me of my father’s story about the Presbyterian Minister who was asked how his Kirk was faring. In his thick Scottish accent, he replied:
    “Not very well….. But thank God, the Methodists are doing even worse.”

  2. Kevin Ronald Lohse
    Posted January 4, 2012 at 7:23 am | Permalink

    “Councils reckon taking more money off us in parking charges and other fees is now the easiest way to bring down their deficits.”
    My Conservative-run RDC has done much to improve services while cutting costs, and has become particularly adept at turning muck into brass. It has fully investigated and implemented cost-cutting measures, such as sharing a CEO, or Town Clerk as they used to be known, but it’s deficit is caused mainly by following Labour’s Treasury instructions by depositing reserves in Icelandic banks.
    The RDC is proposing such measures as charging people to park outside their own homes. In a Rural area, cars are an absolute necessity for family life, and the proposal is viewed as as nothing less than a stealth council tax increase. The RDC have circulated a position paper that in my capacity as a Parish Councillor I have seen and commented on. The arguments for the parking charges are completely spurious and involve some very dodgy statistics. On the other hand, I can understand that councils are under great pressure, with an increased demand for services in a depressed economy, not least by shedding jobs that merely increase the unemployment levels in areas where unemployment approaches 10% The government is not helping things by delaying the repeal of Acts passed under the last regime which increased the duties laid upon Councils for purely Party political advantage. Mr. Pickles should be doing much more than cracking the whip while even councils sympathetic to the Government are forced by necessity to drive a coach and horses through the purpose of a freeze in Council Tax. We have been in power long enough to start repealing the mountain of legislative duties imposed on councils by the last Government, thereby reducing the financial burden on local government.

    • Tedgo
      Posted January 4, 2012 at 11:31 am | Permalink

      Its an interesting point about Councils charging to park outside ones house. Fortunately our Council is not proposing that, but if it did I would make the following points.

      My Title Deeds recognises that I have paid for the pavement and road outside of my house and that I grant unfettered access to other members of the public to use that pavement and road. It also passes on those rights and maintenance to the County Council when they adopt the road.

      If the District Council wanted to collect parking charges, then surely they would have to negotiate with me as I have not granted any commercial rights to the piece of road I have paid for.

      • Kevin Ronald Lohse
        Posted January 4, 2012 at 3:22 pm | Permalink

        Thanks. I’ll check this one out.

      • Bazman
        Posted January 4, 2012 at 8:55 pm | Permalink

        They will charge you a surcharge on your council tax for having a parking space on your property. Or the like.

  3. ChrisXP
    Posted January 4, 2012 at 7:48 am | Permalink

    May I ask what your thoughts are on the suggestion that the UK should place VAT on food and children’s clothes, to “harmonise” with the rest of the EU?

    Reply The answer to that should be “No”

    • uanime5
      Posted January 4, 2012 at 4:09 pm | Permalink

      I thought VAT was already charged on some foods.

      • lifelogic
        Posted January 4, 2012 at 5:59 pm | Permalink

        Indeed it is on cakes, crisps nut & snacks, sweets, chocolates, fruit juices, alcohol (even on top of the huge duty already charged) hot take away food, restaurant food.

  4. ian wragg
    Posted January 4, 2012 at 7:55 am | Permalink

    4 pence a litre on fuel in April and oil reaching $200 a barrel after Iran tries to close the Straights of Hormuz.
    Comodity prices driven up by the BRICs. I don’t think inflation will reduce much unless the Euro collapses and triggers a deep recession.

    • Alan Wheatley
      Posted January 4, 2012 at 10:57 am | Permalink

      While the Iranian theocracy think closing the Straits of Hormuz is a good idea the Iranian Navy does not. The Navy realise that for them to try to implement a blockade would be a quick way to loosing their Navy.

      • Single Acts
        Posted January 4, 2012 at 4:18 pm | Permalink

        Er, no, they would just need to take out one tanker with an anti-ship missile. Then, no others would be able to get insurance to go through and would you send an uninsured tanker through if you owned one with Iran taking random pot-shots?


        And whilst most western warships are quite well protected against missiles with a mix of counter-measures, anti-missile missiles and gattling guns it would be a nightmare of a mission to take on.

        • lojolondon
          Posted January 4, 2012 at 4:55 pm | Permalink

          Well, the last thing the Iranians want is to give the Obama a chance to cement his presidency with a war. Because as Ahmadinajacket knows, the first thing that happens when the war is over in the Middle East is that someone settles an old score, and that could really hurt. Him I mean.

        • Alan Wheatley
          Posted January 4, 2012 at 5:09 pm | Permalink

          Er, yes. To take out one tanker, as you put i,t would not occur without retaliation, which would receive worldwide support because closing an international sea lane is illegal. Further, it does not take much imagination to foresee that such a provocative action by Iran is just the excuse some would be waiting for. And not necessarily just outside Iran.

          Of course all this is speculation. But a vital element of deterrence is for you opponent to be deterred by the certainty of suffering a far bigger loss than the hoped for gain. I tend to err on the side of thinking wiser heads in Iran will prevail.

        • StevenL
          Posted January 4, 2012 at 7:29 pm | Permalink

          Why would launching a few hundred Tomahawk missiles be a ‘nightmare’ for the US Navy? It wouldn’t exactly be the first time they’ve trashed another countries defenses in the space of a week or two from a few hundred miles away.

          It’s a cold war. The US or Israel can’t just attack Iran and Iran can’t go and close a major shipping lane without having their military reduced to a few million blokes with machine rifles.

        • Bob
          Posted January 4, 2012 at 7:32 pm | Permalink

          The last encounter with the Iranian Navy was a humiliation for the Royal Navy (not to mention the UK).

          I hope they leave their iPods behind on the next mission, and concentrate on the job in hand (and no women on the front line please).

          • Alan Wheatley
            Posted January 5, 2012 at 10:26 am | Permalink

            “humiliation” – agreed.

            “ipods” – agreed.

            “women” – I do not want to make a judgement on women as a whole, but just like the men they have to be up to the job being asked of them.

            When the prisoners on the prison ship Altmark heard that “the Navy’s here” they cheered. We need our present Navy to always get such a reception.

          • Bob
            Posted January 5, 2012 at 1:37 pm | Permalink

            “…they have to be up to the job being asked of them.”

            Problem is, as we’ve seen in the police and fire “services”, the barriers are continually lowered to accommodate their limitations. Easier just to say no, and avoid the compensation issues that arise whenever they get upset or break a fingernail.

  5. Rebecca Hanson
    Posted January 4, 2012 at 8:00 am | Permalink

    I think rising commodity prices remain a significant threat.

    It’s a reality that there are now 7 billion people in the world.

    • APL
      Posted January 4, 2012 at 11:29 am | Permalink

      Rebecca Hanson: “I think rising commodity prices remain a significant threat.”

      1. Can high commodity prices withstand the collapse in demand if we continue into a recession. Not many countries are foretasting growth of more than 1 or 2%, that strikes me as being so anemic that is it more hopium that a forecast you can take to the bank.

      Rebecca Hanson: “It’s a reality that there are now 7 billion people in the world.”

      And the doubling time is?

      None of the forecasts for economic activity take into account the collapse of credit. The implications of that for the growth figures is pretty grim.

      • Rebecca Hanson
        Posted January 4, 2012 at 3:54 pm | Permalink

        Current world population growth of 1.14% gives a population doubling time of just under 50 years APL.

        Any collapse in demand due to recession is clearly going to be temporary as the world is capable of organising itself in ever more efficient ways due to the power of ICT.

        • StevenL
          Posted January 4, 2012 at 7:31 pm | Permalink

          You mean like by typing more zeros into the central bank computer?

        • Bob
          Posted January 4, 2012 at 9:54 pm | Permalink


          Why do the UK government provide incentives to people to have more children by paying child benefits and prioritising single mums on housing lists?

          • Rebecca Hanson
            Posted January 5, 2012 at 4:46 pm | Permalink

            These are not incentives for people to have children. They are ways of trying to ensure that children born in the most vulnerable circumstances get a decent chance at life.

            It’s true that sometime teenage girls can think the state will keep them well if they have a kid but the reality of being a single mum is very tough even if you’re not on minimum benefits. It’s important we educate our teenagers about the realities so the fantasies are dispelled.

          • Bob
            Posted January 6, 2012 at 12:47 am | Permalink

            Well they they may not have been intended as an incentive but human nature being what it is, they do.

            What are “minimum benefits”?

          • Rebecca Hanson
            Posted January 6, 2012 at 7:16 pm | Permalink

            @ bob.

            Good question.

            I had in mind the difference between a single mum who is getting nothing but state benefits and one who is also getting support from the father of the child and perhaps family too.

            I need to think through this and the way I express my vocabulary here more clearly. Thanks for the prompt.

        • APL
          Posted January 5, 2012 at 8:49 am | Permalink

          Rebecca Hanson: “population doubling time of just under 50 years ”

          So, by the end of this century there will be approaching 28 billion people on the planet?

          • Rebecca Hanson
            Posted January 5, 2012 at 4:49 pm | Permalink

            By 2062 if the current population growth rate continues. I hope it won’t. In general when poverty and war are eliminated exponential population growth stops. Iran is an example of a country which has made great progress in managing population growth.

        • Mark
          Posted January 7, 2012 at 3:23 pm | Permalink

          Rule of thumb: divide 70 by the percentage rate of increase to get doubling time. 1.14% ~=8/7ths% : 70×7/8 = 61.25 years.

          Precise answer is ln(2)/ln(1.0114) or 61.148 years to 3 d.p.

  6. Pete the Bike
    Posted January 4, 2012 at 8:09 am | Permalink

    Given that the Bank of England hasn’t got a single forecast right for years I suppose by the law of averages it must, at some point, be correct by accident. However there are so many dangerous events coming thick and fast nobody can guarantee anything.
    What happens if the Euro goes down?
    What happens if the lunatic Israeli or American militants get their way and bomb Iran?
    What happens when everybody realises that bank throughout the world have lost between 30 and 60% of their value in 12 months?(that’s a crash in my book and could lead to a run on bank deposits).
    Why have oil prices not done what they normally do in a recession and collapsed to a very low level? Answer is that depletion is forcing prices up. What happens to prices when Mexico and other countries cease to be exporters this year?
    What happens if the UK can’t continue to devalue sterling and thereby inflate it’s vast debts away?

    • backofanenvelope
      Posted January 4, 2012 at 9:55 am | Permalink

      It’s interesting that you think the Israelis and Americans are the lunatics. I would have thought that the certifiable people were the Iranian leadership.

      • Atlas
        Posted January 4, 2012 at 2:23 pm | Permalink

        Sadly sometimes it takes two to Tango.

        • Commenter
          Posted January 4, 2012 at 11:46 pm | Permalink

          Actually, “it takes one to tango” would be a more appropriate saying, when it comes to military conflicts.

      • Single Acts
        Posted January 4, 2012 at 4:21 pm | Permalink

        They all believe in the Abrahamic God, they just call him different things and think he talks exclusively to them.

        (words left out-ed)

      • Rebecca Hanson
        Posted January 4, 2012 at 6:43 pm | Permalink

        I’m not sure the rest of the world agrees backofanenvelope

    • Rebecca Hanson
      Posted January 4, 2012 at 10:53 am | Permalink

      The threat to global peace posed by Israel’s (and shockingly our) behaviour towards Iran worries me a great deal.

      Ahmadinejad is a moderate and intelligent man who’s making a decent job of running a country in exceptionally difficult circumstances. His treatment during his UN speech was absolutely appalling. He had relevant and intelligent points to make. True his perception of the UK is way out of touch with modern reality – so why aren’t we demonstrating that rather than living up to his expectations?

      As we prepare to withdraw from Afghanistan we need to be engaging properly with Russia and Iran and Pakistan and anyone else who cares regarding its future.

      We shouldn’t be imposing sanctions on Iran. Why are we doing it? Because we believe all the propaganda written about the Arab world by Aipac? Well I suppose people who haven’t actually been there might believe it but there’s no excuse for people in positions of respect and authority in Britain.

      Well done Ron Paul for creating this:

      • backofanenvelope
        Posted January 4, 2012 at 11:39 am | Permalink

        “Ahmadinejad is a moderate and intelligent man who’s making a decent job of running a country in exceptionally difficult circumstances”

        Please tell me you are joking.

        • Rebecca Hanson
          Posted January 4, 2012 at 4:05 pm | Permalink

          Here’s the speech backofanenvelope.

          What do you agree with and what do you disagree with?

          • Commenter
            Posted January 4, 2012 at 11:48 pm | Permalink

            Personally, I disagree with the (way-ed) the young men and women who dare to protest against the ‘sensible’ Mr Ahmedinejad’s regime (are treated-ed)

      • Sebastian Weetabix
        Posted January 4, 2012 at 12:22 pm | Permalink

        “Ahmadinejad is a moderate and intelligent man” Are you for real??

        This is the man who expects the 12th Imam to make an appearance; doesn’t believe the Nazis wiped out the bulk of European Jewry; is on record as wanting to wipe Israel off the map; has been providing IEDs to interested parties to blow up British soldiers in Iraq & Afghanistan. This man was directly involved in the takeover of the US Embassy in Tehran and then held all the people in it hostage for 444 days. He is not moderate; he is the leader of the “Alliance of Builders of Islamic Iran” – in other words, he is a (man-ed) with a messianic vision who is instrumental in exporting Islamic revolution.

        Israel, by contrast, is a parliamentary democracy (considerably more open than ours by the way, with the minutes of cabinet meetings published in full) with a free press. They haven’t threatened to wipe Iran off the map, yet you think they are the threat. You have a world view somewhat divorced from reality, I fear.

        • Rebecca Hanson
          Posted January 5, 2012 at 5:00 pm | Permalink

          I did reply to your post yesterday Sebastian but the reply hasn’t gone live. Sorry about that.

      • Mark
        Posted January 4, 2012 at 1:07 pm | Permalink

        I don’t agree with your assessment of Ahmadinejad. Rafsanjani, who was ever the sensible pragmatist, is now under virtual arrest and his daughter has just been jailed for supporting Mousavi.

        Clampdowns ahead of the March 2nd elections are inevitable, as is the sabre rattling. Perhaps the US has a Persian Spring in mind?

        • Rebecca Hanson
          Posted January 4, 2012 at 4:04 pm | Permalink

          Thanks for the article link Mark – that info isn’t on Rafsanjani’s wiki.

          The general perception is Iran is that the US and Israel have been deliberately trying to create a Persian spring for quite a while already, along with (allegations of assassination of-ed) Iranians and generally trying to cause instability and prevent technological progress.

          Ron Paul seems to think that’s a bad idea.

          I agree with him at present but welcome relevant points such as yours.

          Are you confident a country nestled in between Afghanistan, Pakistan and Iraq could be better run?

          • backofanenvelope
            Posted January 4, 2012 at 4:50 pm | Permalink

            If you are an Iranian with a “perception” that differs from that of the Persian government you are likely to be in a very uncomfortable jail.

            Having said that, I think the Israelis should back off and we should all let him get on with building his bomb. We used to call the policy – MAD. It seemed to work.

          • Rebecca Hanson
            Posted January 4, 2012 at 6:00 pm | Permalink

            Hopefully a 6 month sentence indicates they aren’t intending bad things for her which could be more easily concealed in a longer sentence. I write letters for Amnesty so may hear if they become concerned. I know it’s not much but I try.

            Which policy did you call MAD?

          • Mark
            Posted January 5, 2012 at 3:50 pm | Permalink

            I don’t think Wiki should be considered a reliable source when there are factions ready to edit it. You need to read far more widely to understand Iranian politics, rather than being swayed by propaganda.

            You seem to be unaware of the disputed presidential election where reformer Khatami “lost” to Ahmadinejad in 2009. Recent developments in Iranian domestic politics suggest that Ahmadinejad and the hard line elements of the theocracy intend to rig the next (parliamentary) elections too. That hardly suggests that the people consider the country to be well run. Finding Rafsanjani and Mousavi – both of whom held high position in the post revolutionary era (Rafsanjani was President and Speaker of the Majlis – far more powerful than Bercow – and Mousavi is a former PM) – as part of the opposition rather than part of the government is a clue that they think it isn’t being well run either. Locking up Rafsanjani’s daughter until after the election is just part of that picture.

          • Rebecca Hanson
            Posted January 5, 2012 at 4:54 pm | Permalink

            All good points Mark. However are things so bad that we should interfere – given that we are not interfering in Syria?

            Are the assassinations and the sanctions justified?

            I can see the problems in Iran, but am just concerned that our interference won’t lead to a better Iran.

      • Single Acts
        Posted January 4, 2012 at 4:23 pm | Permalink

        Whilst I can’t call him moderate in any sense (he’s as much of a gangster as anyone else leading a country) he does get an awful press, some of his own making, some not.

      • lojolondon
        Posted January 4, 2012 at 5:04 pm | Permalink

        Rebecca, I also like Ron Paul, and particularly Ron Paul’s adverts.

        But – Israel is RIGHT and Iran is WRONG. Israel is a friendly nation that wants to be secure to exist. Her neighbour states have sworn to destroy Israel, and never miss a chance to kill Israelis.

        I will listen to your point of view – but only after the president of Israel promises to destroy Iran and kill every Iranian. Until then the Israelis are the good, peace-loving guys.

        • Rebecca Hanson
          Posted January 4, 2012 at 10:44 pm | Permalink

          Reference for the comment on William Hague:

          His statement starts at 12:33 and then he makes some further comments during the questions he takes after it.

          I like and respect William Hague but our position on Iran completely baffles me because he seems incapable of considering that Iran may be developing nuclear weapons for peaceful reasons. We did it. They clearly are too. Wouldn’t you if you were a major power stuck between Pakistan and Israel neither of whom will sign the nuclear non-proliferation agreement?

          • APL
            Posted January 5, 2012 at 9:30 am | Permalink

            Rebecca Hanson: ” .. seems incapable of considering that Iran may be developing nuclear weapons for peaceful reasons.”

            Isn’t there an inherent contradiction in that phrase?

            Iran could develop viable Thorium reactor technology, the nuclear reaction does not produce plutonium as a fission by product.

            If Iran wanted cheap nuclear power, why don’t they develop Thorium technology – come to that why don’t we? – in fact as they choose not to, then it must be to supply their nuclear weapons program.

            Kindly suggest a peaceful use for a 100MT nuclear bomb?

          • backofanenvelope
            Posted January 5, 2012 at 9:46 am | Permalink

            I quite agree with your last sentence. And by the way – MAD is Mutually Assured Destruction. You blow us up and we’ll blow you up. Have you noticed that there are no Muslim priests amongst the (people-ed) who blow themselves up? This observation ties up with my belief that the invention of the atomic bomb was the best thing since sliced bread for the common man. No longer could our rulers send us off to die, confident that they would die in their beds.

        • Rebecca Hanson
          Posted January 5, 2012 at 4:56 pm | Permalink

          “Kindly suggest a peaceful use for a 100MT nuclear bomb?”

          Maintaining political stability if you run a large country which is in between Pakistan and Israel, both of which are nuclear powers which refuse to sign the Nuclear Nonproliferation agreement.

          • APL
            Posted January 6, 2012 at 8:17 am | Permalink

            Rebecca Hanson: “Maintaining political stability,”

            Gosh, you version of reality is quite ”other”‘. Iran, politically stable? I think not.

        • Rebecca Hanson
          Posted January 6, 2012 at 7:22 pm | Permalink


          Well this conversation would be rather dull if it wasn’t.

          “Iran, politically stable? I think not.”
          Do you think the current intervention (the assassinations, sabotage and sanctions) is making it more or less stable?

          Which interventions do you think would make it more stable?

    • Mark
      Posted January 4, 2012 at 12:59 pm | Permalink

      Oil prices along with other commodities are high because investors view them as a better store of value than dollars, euros or pounds. There is a question as to how much of the price reflects bubble conditions, because none of the commodities has sufficient capacity to act as money. Such fears probably lie behind much of the recent selloff in gold (and oil).

      For example, there is about 140,000 tonnes of gold in existence that has been mined – 20 grammes per head among 7 billion of the population. The gold price is about £33/gramme ($1600/oz), so that is just £660 per head, or £4.62 trillion globally.

      Absent Iran creating a supply problem (or other important geopolitical developments), the outlook for oil would probably be for price falls as Libyan production is increasingly back on stream, while demand will be weak due to poor economic growth globally.

      • Robert Christopher
        Posted January 4, 2012 at 5:05 pm | Permalink

        20g of gold has the weight (or more correctly, the mass) of 2.1 pound (£) coins
        20g of gold has the volume of 0.92 pound (£) coins

        The mass of a pound coin is 9.5g.

        20 g of gold will has a mass of 20 / 9.5 = 2.1 pound coins

        Given that a pound coin is made from:
        70% Copper (density 8.9),
        5.5% Nickel (density 8.9)
        and 9.5% Zinc (density 7.1)

        I calculate its density (assuming it is a simple mixture) to be around 8.5.

        With the density of gold being 19.3,
        20g of gold will have a volume of 2.1 * 8.5 / 19.3 = 0.92 pound coins

        With a special thanks to Mr Gittos, my Physics teacher at school, many years ago!

        • Bazman
          Posted January 4, 2012 at 9:07 pm | Permalink

          Apparently a lot of gold is now made out of paper these days, in fact there is more made from paper than gold. The technical term for this phenomenon that defies all laws of physics and most others is known as common theft or fraud. This effects the reality by up to 13% (expressed in currency.) between the two.
          Special thanks to my current teacher Max Kieser on Russia today.

          • Mark
            Posted January 5, 2012 at 1:39 pm | Permalink

            Even more is just made from a few electrons in computer memories. Paper records of futures transactions have been largely eliminated.

      • Rebecca Hanson
        Posted January 5, 2012 at 4:59 pm | Permalink

        The economic effects of wars are much greater than just the curtailment of the supply of one commodity from one country.

      • Robert Christopher
        Posted January 6, 2012 at 12:20 pm | Permalink

        The proper use for gold, but still not using their full quota:

        Beginner with Midas touch finds gold for engagement ring in the Highlands

        “Rather than take a trip to the jeweller’s, the 46 year-old decided to pan his own gold in the Highlands as a unique symbol of his love. To the astonishment of experts, Mr Greenwood produced 34 grams of gold that he claims to have collected in just three months.
        He had it made into a ring set with three diamonds and presented it to his girlfriend of three years, Morag Shearer, in a Christmas proposal.”

        Congratulations to them both!

  7. zorro
    Posted January 4, 2012 at 8:11 am | Permalink

    It’s possible, but I think other events/considerations will mean that inflation stays high.

    There will be some discounting as there is a lot of stock to shift, and sellers are keenly aware of the need of people to pay off debt, and the natural deflation feel that brings. As you say, the internet world market is an excellent consumer tool. We would have struggled
    more in the Seventies. Technology is a potent force in coping with the downturn.
    I remember you saying about two years ago that prices would increase and this would impact on inflation. Prices, however, remained comp

    more in the Seventies

  8. zorro
    Posted January 4, 2012 at 8:21 am | Permalink

    Sorry phone acting odd….prices remained competitive but inflation stayed high. I am still not convinced that they want low inflation. As Javelin mentioned, there is a tendency to higher inflation around the world to try and ease the debt crisis.

    We know that QE is a device to fund government spending and ZIRP to control the cost of borrowing.
    In short, though outwardly the signs seem to suggest an environment where price pressure is weak, macro economic policy is more tolerant of an inflationary outlook

  9. zorro
    Posted January 4, 2012 at 8:23 am | Permalink

    Do not underestimate the effect of any Eurozone crisis or hyper inflationary effects wbich might result from their efforts to tackle it.


  10. Paul
    Posted January 4, 2012 at 8:27 am | Permalink

    “I do not expect the government to add to inflation again by further VAT or sales tax rises.”…….
    Not according to the Institute of fiscal studies. They predict tax rises of £1400 over the next year.

    Reply: They are not forecasting VAT rises

    • Mark
      Posted January 4, 2012 at 1:24 pm | Permalink

      On the other hand, VAT seems to be one of the few taxes that is on the right side of the Laffer curve. The rate increase has seen revenues move up by 19.9% over April-November, and 18.4% over January-November. If Osborne wants to raise revenue, rather than make gestures by increasing rates at the expense of revenues, VAT must look very tempting.

      • uanime5
        Posted January 4, 2012 at 4:17 pm | Permalink

        The Laffer curve shows that maximum revenue won’t be raised if taxes are too high or too low, so lowering taxes doesn’t mean it’s on the ‘right side’ of the Laffer curve.

        • Mark
          Posted January 5, 2012 at 1:35 pm | Permalink

          Being on the wrong side of the curve implies that rates are too high, because a rate increase has resulted in lower revenue. That appears to be the case for income tax. Being on the right side of the curve means that a rate increase has resulted in an increase in revenue. In the case of VAT, revenue increases have exceeded the percentage increase in VAT (2.5% on 17.5% is ~14.3%).

  11. Brian Tomkinson
    Posted January 4, 2012 at 8:50 am | Permalink

    I expect we shall soon be hearing again that deflation is more of a concern! We always must have something to worry about whilst our savings and earnings are being remorselessly eroded.

  12. lifelogic
    Posted January 4, 2012 at 8:57 am | Permalink

    Inflation may indeed fall a little when the VAT drops out and workers buying power is squeezed hugely (unless they are state sector workers on a variable rate mortgage with an inflation linked defined benefit pensions).

    But a weak pound will still push up energy and commodity costs, monopolies like the state will still exploit their position and Huhne’s policies and general over regulation of everything (boilers, energy certificates, for example) will further push up pointless costs.

    The London low emission zone is costing my builder about £2,000 for example.

  13. alan jutson
    Posted January 4, 2012 at 9:02 am | Permalink


    Your comment about squeezed margins, bargain basement buying, and the costs of running a lower cost internet business, mean that it is a false level of pricing we have at the moment, due to very low demand for anything, other than the essential goods like foodstuffs and replacements.

    Your admission, with which I agree, that the more expensive better designed and manufactured goods and services are suffering, means the economy is heading t0wards the 99p type economy, you cannot export that sort of business product to lose our trade gap.

    Yes the fact that the VAT rise of 12 months ago is now out of the equation, will help the figures from now on in, but as soon as demand starts to pick up (god knows when) margins will need to be restored to sensible levels where companies can still make a reasonable profit and re-invest to grow, rather than just having to turnver goods to stand still.

    Thus the private sector (as above) is doing its bit and has had to be flexible to survive.

    You say train fares are likely to continue to rise (due to reducing of subsidy), parking charges will rise (to help local authority income), probably utility bills will increase (due to the bling tax), Fuel tax will rise, probably due to lower volumes being sold as people cut back on journey’s (government will take action taken to keep up their income on lower sales ) Council tax cannot be frozen forever, much as I would like it to be.

    So we have all of the things the government and local government are involved with, still rising.

    All seems a bit one sided to me.

    How about government cutting its costs to suit its income like the private sector.

    Spend based on last years income, not based on some pie in the sky dream of growth, real growth, which is probably years away.

    Let us attack the problem from both ends, with the Government doing their bit along with the Private sector, with, Flexiblity, cost reduction, and by being more efficient,

    • alan jutson
      Posted January 4, 2012 at 9:03 am | Permalink

      to lose our trade gap should read. “to close our trade gap”.

  14. Alex
    Posted January 4, 2012 at 9:29 am | Permalink

    I have to agree with lifelogic on energy prices. DECC will no doubt continue their relentless efforts to make energy more expensive.
    Ah no, sorry, we will all be using less energy, therefore making energy ‘cheaper’ according to DECC logic.

    • lifelogic
      Posted January 4, 2012 at 1:15 pm | Permalink

      We will perhaps be using less energy because so few will be able to afford to heat their homes and even more will not be travelling to work (as so few jobs will be available). This until Cameron is eventually forced to start to move in the, smaller government & fewer regulations direction.

    • Mark
      Posted January 4, 2012 at 1:33 pm | Permalink

      The mild winter so far will have been a great help towards cutting energy bills for households. The problem may be that suppliers have bought too much at high prices, and have losses in consequence that they expect to recoup from customers. UK gas prices have now fallen to 53p/therm at wholesale (and that for February – traditionally the coldest month), down from about 65p/therm in the autumn. We’re going to need global warming to make heating bills smaller under Huhne’s policies.

  15. Gary
    Posted January 4, 2012 at 9:49 am | Permalink

    “There is always the danger that the pound could fall again, as there is going to be no shortage of pounds given the policy of quantitative easing. ”

    That is precisely the definition of inflation. So if there is no shortage of pounds , there should be no shortage of inflation ?

    Actually, much of the QE money is circulating between the central bank and the commercial banks, as they buy and sell each other govt bonds. There is where the inflation is contained. Meanwhile in the private sector , where there is record amounts of debt, there is also a money shortage, and a sharp deleveraging is well overdue, and so we could see a weaker pound for imported commodities eg oil, and
    more unemployment. Stagflation. If fact we almost certainly have some form of the latter already.

    I pasted this link before. It is worth re-reading IMO. We are on the brink. We make Europe look good by comparison :

    • Martin
      Posted January 4, 2012 at 1:15 pm | Permalink

      Thank you for that link.

      Some very bad graphs on there for UK plc. This perhaps explains why despite the huge negative campaign against the Euro the Pound remains weakish (well below the initial launch price £1=€1.43)

    • Winston Smith
      Posted January 4, 2012 at 2:05 pm | Permalink

      Private sector debt needs to be expressed comparative to assets. Many households in the street will have mortgages at varying levels, some small some large. Several households will have no mortgage and large assets in bank deposits, investments, pensions, possessions, and the value of their house. How does the value of private sector assets, particularly household, compare to the US and Australia?

    • Mark
      Posted January 4, 2012 at 2:38 pm | Permalink

      QE at present at £5.1bn per week exceeds government deficit financing. That means that the BoE is a net buyer of gilts in the market over and above the issues being sold by the DMO, and the government is spending printed money. It is an interesting question as to who the net sellers of gilts (and consequent recipients of printed money) are – and what they are doing with the pounds they receive. Perhaps they are investing in commodities…

      The rest of the printed money (i.e. the deficit spending) is going to welfare recipients, government employees and contractors. I doubt that it ends up in bank vaults.

      Incidentally, I took a look at the status and accounting of the BEAPF recently. The accounts are here:

      and are made up to 28 February 2011. They show the treatment of the initial £200bn of QE. Digging around in the footnotes (18) we find that it is financed by a £200bn loan from the BoE itself – paying £999.7m in interest (i.e. a 0.5% loan). There is no record of the interest paid on the gilts held in the accounts at all, except as part of the cash balance . Everything is hidden behind a smoke and mirrors “derivative” accounting convention (IAS 39).

      The Treasury indemnity for losses works in both directions, so the mark to market gain in gilt values since purchase (£9.8bn) is recorded as a guarantee liability – currently exceeded by the £11.8bn cash balance. However, the data available here:

      show that gilts purchases to 14th December were at a premium of some £28bn to par. If the gilts are held to redemption then this £28bn will be a real loss, although presumably coupon income (currently £10.4bn p.a.) will offset it. Some £51bn has already been spent on the current QE round.

      Current holdings start to be redeemed in 2013, when some £7.7bn is due. This is followed by £20.9bn in 2014, £21.5bn in 2015, and £10.4bn in 2016. How this partial QE unwind will be handled remains unspoken.

      • Gary
        Posted January 4, 2012 at 3:10 pm | Permalink


        “It is an interesting question as to who the net sellers of gilts (and consequent recipients of printed money) are – and what they are doing with the pounds they receive.”

        The commercial/investment banks. The pounds they receive are used as collateral to buy more bonds to sell to the central bank. Theese commercial banks make the market for govt bonds, and it appears that they are merely selling them back to the central bank , who through QE is a guaranteed buyer at any price. Not only that but there is evidence that the investment banks are creating their own supply of govt bonds by naked shorting them and then selling them to the central bank(short selling involves borrowing a security and selling it only to buy it back later , hopefully at a lower price to make a profit. Naked short selling involves creating a security “out of thin air” and selling it, without having to worry about buying it back later, since it arose out of nothing). Acknowledged by Merkel and Sarkozy in the EU:

        “The German chancellor Angela Merkel and French president Nicolas Sarkozy have called for a total European ban on naked short-selling of government bonds.”

        Why should banks loan money to risky private businesses when the central bank is a certain buyer of debt with unlimited resources (they can just print) ?

        • Mark
          Posted January 4, 2012 at 7:52 pm | Permalink

          Check out the B3QP series at the BoE:

          It shows that UK banks have been significant investors in gilts – not sellers. Overseas banks appear to have been sellers since the summer: perhaps other foreign interests too. We only get limited data on foreign ownership about six months in arrears – available at the DMO here:

          At end Q2 2011 they were £323.5bn. When the first bout of QE took place, overseas holders became net sellers of gilts. They became significant net purchasers when the new government announced its intention to tackle the deficit rather than print its way out.

          Don’t confuse the role of banks as intermediaries with holdings on their own balance sheets. The fact that they are the conduits through which DMO sales are distributed, and through which QE tenders are offered just enables their own balance sheet changes to hide behind the general flow in the market.

      • Rebecca Hanson
        Posted January 4, 2012 at 4:38 pm | Permalink

        Possibly the only positive thing to say to that is that at least someone understands what’s going on….

        Do you work in the treasury Mark? If not are you confident the people who do work there properly understand both the likely future cash flows and the the possible extreme scenarios?

  16. Single Acts
    Posted January 4, 2012 at 9:58 am | Permalink

    The elephant in the room is of course euro sovereign debt and how this is financed. If actual austerity is forced on the Europeans then yes we could well see inflation fall off. If the ECB start buying bonds with their own Euros newly created then possibly your analysis could be off somewhat.

  17. javelin
    Posted January 4, 2012 at 10:04 am | Permalink

    The debt crisis is a long time in the coming – but will very short in its execution.

  18. GJ Wyatt
    Posted January 4, 2012 at 10:07 am | Permalink

    Inflationary expectations appear muted, this despite the substantial erosion of living standards in the past year due to inflation. And it reinforces the mechanical effect of VAT unwinding, dampening commodity prices due to weakened global demand, and sterling’s steadiness as a safe haven within Europe for portfolio investors. So weak inflationary expectations are probably quite rational, and a boon to the Treasury and the Bank, facilitating their management of the economy.

  19. David
    Posted January 4, 2012 at 10:07 am | Permalink

    John, some interesting comments.

    My own view is that after a minor reduction, inflation will remain in the range 4 – 6% from Q2 through the rest of the year.

    Do you think it will be lower than this? (Your comments seems to suggest that it will).

    My view of the lowest possible figure in any single month is 3.5%.

    PS Do you have any other predictions for 2012?

    Reply: I do not expect inflation to reach 6% nor to stay above 5%. The lowest figure should be below 3.5%
    I have made various other predictions for 2012. I expect official rates to stay low in the US, UK and Euroland, for there to be a recession in parts of the EU and reasonable growth in the emerging economy world, linked to lower interest rates and easier money there.

  20. MajorFrustration
    Posted January 4, 2012 at 10:11 am | Permalink

    Agree – there should be more lending to the pirvate secotr SMEs but when is somebody going to do something about it – talks cheap.

  21. Disaffected
    Posted January 4, 2012 at 11:16 am | Permalink

    John, The French Finance Minister is reported today saying that a European financial transaction tax will be imposed by the end of the year because Sarkosy and Merkel want it. Apparently it is on the agenda for the meeting this month. Many of us do not expect Cameron to act on his pledges/promises to renegotiate or repatriate powers or act in the true national interest.

    How will this affect the balance sheet and impact on our nationalised banks?

    I also note Dr Leigh is being knighted for services to enlarge Europe, recommended by Maude and approved by Cameron, hardly the actions of a Eurosceptic.

    Reply: I assume the UK will not impose such a tax, so we should gain if France and Germany do.

    • Robert Christopher
      Posted January 4, 2012 at 5:36 pm | Permalink

      “I also note Dr Leigh is being knighted for services to enlarge Europe”

      I thought that enlarging the EU was a plan to dilute the influence of some other countries in particular.

    • Robert Christopher
      Posted January 4, 2012 at 7:28 pm | Permalink

      JR: “… I assume the UK will not impose such a tax …”

      “PARIS — A European financial transaction tax will be in place by the end of year, French minister for European affairs Jean Leonetti said on Wednesday, apparently speeding up the timetable.”

      The UK does not need to impose such a tax for one to be put in place.

      If we are at the heart of Europe, the EU will do it for us. As for “speeding up the timetable”, if Cameron doesn’t “apply another ‘veto'”, and soon, what is there to expect other than a European financial transaction with the proceeds going to Brussels before the end of the year?
      We didn’t get a Working Time Directive, did we? Well not at the first attempt.

      John, we all know what happens after an ‘ass-u-me’, so please can we have an action plan! If anyone in the House of Commons can do it, you can ! 🙂

      Reply: I do not expect this government to seek Parliamentary approval to impose one, and I would vote against if they did try.

      • Robert Christopher
        Posted January 5, 2012 at 6:58 pm | Permalink

        Thank you John; hopefully more MPs will see the light.

        But can we stop QMV bringing in a European financial transaction CHARGE? It would amount to the same thing as a tax.

        Or rather, would our PM do anything about it?
        Would there be any government announcement before it was ‘enacted’ ?
        Would they know what was happening?
        One does despair!

        Reply: I assume we can still veto this. It would need Parliamentary approval, and some of us have no intention of supporting it.

  22. Chris
    Posted January 4, 2012 at 11:39 am | Permalink

    Not sure if you will permit this diversion, but it is worth noting the significant developments in the ECB, and the appointment by Mario Draghi to the ECB board of Belgian, Peter Praet, to replace Jurgen Stark – a move apparently highly unpopular with Merkel who wanted, and expected, Jorg Asmussen to get the job. More detail can be found in the analysis from which quotes the Deutsche Mittelstands Nachrichten ‘…now, the decisions made by the ECB’s Board will be influenced by those countries who are dependent on money. Germany, in contrast, as the most potent paymaster, has lost a massive amount of influence.’

    Also comment in Der Spiegel today:,1518,807069,00.html

  23. Caterpillar
    Posted January 4, 2012 at 11:41 am | Permalink

    The CPI was 121.2 in November 2011, in June 2011 it was 119.4, this implies that CPI needs to at most stay flat until June 2012 for the inflation rate to be down to 1.5% by mid next year – I think this was Mr Posen’s ‘promised’ resign number in the Guardian interview (

    I cannot see CPI remaining flat until June 2012 for the following reasons; (i) US signs of recovery knocking onto oil prices, (ii) strengthening USD, (iii) QE, (iv) potential supply chain breakdowns (+ fear hoarding of anything tangible) and, mostly (v) that the BoE/MPC seem to have been on a nominal growth target.

    Even if CPI stays flat, prices will need to remain such for two or three years for household purchasing power to recover as earnings have not kept up.

    My one positive view on prices is that many larger retailers appeared to (I have not checked accounts, just went shopping) be switching to a cash focus rather than a ROCE & revenue foci and hence to higher margin product mixes (- to the surprise of the MPC?) when the liquidity uncertainty struck, perhaps having had 3 years of this switch they are now better positioned to compete on price (or no need for further change).

    • Mark
      Posted January 5, 2012 at 1:22 pm | Permalink

      I do hope Mr Posen will be held to his promise.

  24. Martyn
    Posted January 4, 2012 at 11:41 am | Permalink

    “Councils reckon taking more money off us in parking charges and other fees is now the easiest way to bring down their deficits”. Yet none of them will shed the ‘political advisers’ that each party has embedded into the Councils at rate-payers expense. I have challenged this locally and been firmly rebuffed, told that “it is allowed within the Law and all do it”. I can see no justification for being charged by Council tax to pay for expensive political advisers – they are of absolutely no use to me and I wonder many other equally useless people are employed along these lines at district and county level?

    Several years ago my district council declared an income of £5m and promptly put £6m into the County pension fund. I was told it was a cost-saving measure (though they were unable to properly explain that to my satisfaction) and that the money had come from the district reserves. With attitudes within councils like this there is no hope at all of evr seeing their costs come down.

    • uanime5
      Posted January 4, 2012 at 4:26 pm | Permalink

      You could start an online petition for a change in the law.

  25. Iain Gill
    Posted January 4, 2012 at 12:34 pm | Permalink

    I will believe it when Index Linked National Savings Certificates go on sale again, I am not holding my breath

  26. sm
    Posted January 4, 2012 at 1:23 pm | Permalink

    It seems the BOE has an inbuilt tendency to favour inflation above target.
    (Given debt burdens it is understandable, what other policy tools does it have or will it be given to directly sort the (publicly subsidized sector) banks out!)

    As QE and ZIRP continue (banks not sorted), the £ will devalue and will drive further price increases in unavoidables. As a result spend will reduce on other items. My basket of goods/service is pretty much essentials?

    With record immigration and a competitive labour market for the workers in the real private sector.(This wage competition doesnt seem to apply uniformly with many protected sectors, loss making banks or mid to senior echelons of the public sector)

    Exactly what is pushing inflation down and can i eat it? I suspect, its demand destruction in areas where it has been forced in the true competitive private sector.

    On a side issue, I still reckon its early days and that those windmills and grid work will be ‘fiat money’ well spent. The real income stream will remain but the debt will inflate away.(Normal economics are out of the window).

    If our debt/GDP is as high as some imply 1000% our interest bill would be £15 trillion * 0.02=£300 bn. Inflation at 5% = £750bn. Pray advise why QE wont continue?

    • Mark
      Posted January 4, 2012 at 2:54 pm | Permalink

      I am not so sure about those windmills. Paying twice and three times as much as for other power sources via ROCs is a subsidy that isn’t really sustainable, and the latest proposals to subsidise grid extension to connect more windmills in Scotland are equally insane. We’ve already seen the FiT halve. Let the French and German utilities suffer. We’ve already been through one round of bankrupted suppliers (which is how the French and Germans got in, buying up the weakened UK distributors and generators). Time to rinse and repeat.

      • sm
        Posted January 5, 2012 at 1:54 am | Permalink

        I am not sure either but the marginal cost of wind is low. (just 1 cent kwh. We might even get economies of scale which never materialised with nuclear power. All plant needs to be connected to the grid and transfers managed,so the system benefits as a whole as well.

        But infrastructure spend is also helpful as we go through a down phase in financial deleveraging. Particulalry if the stuff is made and maintained in the UK. There are probably other less productive uses of money to save, EU fees , bank subsidies, aid to superpowers etc.

        One to watch and adjust as needed as time progresses like nuclear but more transparent.

  27. JimF
    Posted January 4, 2012 at 1:35 pm | Permalink

    The answer to your question is yes and no.
    In the absence of lower than target inflation or outright deflation, their past mistakes on inflation won’t be corrected. We can’t just push the reset button every month. What is lost is lost, and there seems to be no admission or acceptance of this fact.
    On the other hand the fact that inflation rates might come down to less than double their target, could, in some tongue-in-cheek way, be welcomed.

  28. Zarathustra
    Posted January 4, 2012 at 1:40 pm | Permalink

    Do you have a longer term view on inflation?

    There is an obvious policy by the BoE and most other central banks to maintain negative real rates. Even with small rate rises, the rates are unlikely to go positive any time soon. With that in mind, do you have any fears in regards to medium-long term inflation in the uk?

    Reply: If they ever mend the banks then the money printing will be very inflationary. For the time being the banks are not able to lend it on and gear up, so it is not. It could become more inflaitonary even without stronger banks if pritning more weakens the pound further.

    • Gary
      Posted January 4, 2012 at 4:17 pm | Permalink

      “If they ever mend the banks then the money printing will be very inflationary. ”

      I think this is very true and makes what they are doing incredibly dangerous. Especially if while the banks and the central bank are tying up the money in their deadly bond embrace, the private concurrently sector deleverages, then we run a big risk of hyperinflation when the money does come flooding out of the banks. Interest rates on Govt debt will skyrocket. They are walking a tightrope and I have no confidence that they will get it right. Certainly history is against them.

      • Gary
        Posted January 4, 2012 at 4:18 pm | Permalink

        make that “private sector concurrently deleverages”. Apologies.

  29. RDM
    Posted January 4, 2012 at 2:07 pm | Permalink

    ” The recovery needs more private sector bank lending to worthwhile projects”.

    Totally agree with that!

    QE has been a useful tool, but now we really need to put our house in order. A focus on wealth generation and free enterprise. From the People up, with local solutions, and a British Banking System to match!

    If there is more QE to come, then the BoE should hold £1bn 10yrs bonds, paying <3% of 200+ Regional Banks!

  30. Quietzaple
    Posted January 4, 2012 at 3:07 pm | Permalink

    Her Maj’s Government didn’t get inflation right when they increased VAT: they put inflation up by 1.6% and killed off the Labour managed recovery.

    • APL
      Posted January 5, 2012 at 12:56 pm | Permalink

      Quietzaple: ” and killed off the Labour managed recovery.”

      The ‘Labour managed recovery’ was predicated, like all other ‘recoveries’ in the last fifty years on, credit.

      That is making us here and now poorer. But calling it ‘growth’ then.

  31. lola
    Posted January 4, 2012 at 3:30 pm | Permalink

    There is a big problem with Mr R’s analysis and that is a confusion between ‘inflation’ and the ‘rise in the cost of living’. The problem is that the Bank of England shares this confusion which is explains why their predictions (impossible anyway) have been / will continue to be, dire.

    Firstly, inflation is a function of money. Money is a commodity with, for all intents and purposes, a zero cost of production. If too much is produced its price falls, and hence the goods and services priced in that commodity we exchange for it will rise.

    Secondly the cost of living can be affected by a range of factors that prevent the prices of the goods and services we buy achieving equilibrium, or trending lower, as capitalism does more for less every day. Mostly these are government inspired taxes, subsidies (the reverse of taxes), sclerotic regulation and similar interventions in the spontaneous order of the free market. These price rises are not inflation. They are simply price rises caused by government. This is what confused Brown (easily done with such a numpty). He thought that the lack of price rises meant that his loose money/high debt policies weren’t inflationary. What he failed to factor in were the price reductions coming on stream from the economic liberation of China and similar. His legacy is real inflation.

    The situation now is that the government in trying to put right both Brown’s inflation – an unwarranted expansion in money and credit, and his price rises – excessive taxation/subsidies and regulation, by increasing prices by increasing taxes, rather than by properly cutting goverment spending. Which Mr R has already said many times that they are not doing at all.

    What now has to happen, and will so despite whatever the Coalition or the Bank of England do is deflation and de-gearing. The deflation is already under way as the money supply (i.e. the [fraudulaent?] creation of credit) contracts. At the same time assets purchases at inflated prices and bad investment made under the false price signals under Brown’s lunacy will have be liquidated, and they are being. In fact most of these were in real estate, and house prices will fall a lot more.

    But because the Governemnt and the Bank of England mis-define inflaiton they will make this process unnecessarily painful , and so prevent us from benefiting from this process. Government made price rises from taxes and the like will make us even poorer and worst of all utterly constrain real wealth creation and the maximising of production, which in its turn would create real jobs.

    Reply: The Bank’s task is to control measured inflation, which is measured by a basket of goods where relative prices may shift, and where there are arguments about how you adjust the index for changing quality and styles of product purchased. Measured inflation may be your monetary inflation or movements in prices caused by other factors.

    • zorro
      Posted January 4, 2012 at 8:23 pm | Permalink

      Agreed Lola – The inflation measure depends on the goods which are in their basket and their relation to the true price increases in normal life experienced by the consumer over time…i.e we do not buy a TV and DVD every week.

      I doubt that the monetary authorities will be able to contain the inflationary effects of QE in USA/UK and soon the ECB in Euroland. Though QE is being used as a ruse to fund government spending, they still have to wind it down at the right time. I doubt that they will be able to stop now that they have started. They are too busy worrying about how to get their masters re-elected. The necessary deleveraging and reduction in house prices to reflect our ability to pay is too much for them to contemplate in reality.

      With regards to inflation, here are two definitions:
      1. Inflation is an increase in the price of a basket of goods and services that is representative of the economy as a whole.
      2. Inflation is the rate of increase of all prices in an economy over time. Inflation results when the supply of money grows faster than the availability of goods and services in an economy.

      The second is closer to the reality. Rising prices are a symptom of the inflation ailment which is caused by an excess money supply/creation in relation to demand/productive capacity.


    • lola
      Posted January 5, 2012 at 2:16 pm | Permalink

      Reply to Mr R’s reply. Quite, and that is exactly the problem. In a properly free market prices trend to equilibrium, in other words there is no neeed at all for ‘controlling measured inflation’, because there isn’t any. It will self regulate. History bears this out as generally – war time excepted – capitalism has delivered more for less every day and prices have fallen. Until that is you get the establishment of central banks and the quaint idea that they can be used as tools to ‘regulate the economy’. These organisations with politicians pushing and commercial banks pulling then oversee the expansion of the (fiat) money supply to encourage banker and voter-friendly booms which then fail and the money supply has to be reined in. This perpetual cycle of failure is guaranteed to keep happening especially if for self serving reasons politicians and central bakers deliberately mis-define inflation.

      The solution to this is in your hands Mr R. In part it is the use of the correct monetory defintion of inflation; the reform of Peel’s 1844 Bank Charter act with respect to the fractional reserving of chequing accounts; and to stop employing central bankers who persist in thinking that they alone – one man – know exactly how much to nudge the tiller of the economy to get it to ‘work smoothly’. This is self evidently preposterous.

  32. Sue Doughty
    Posted January 4, 2012 at 3:33 pm | Permalink

    When you say “Two large banks are still weak …” do you mean the two major French banks that are set to be in a lot of trouble quite soon?

    RepklyNo, I mean the two UK banks that are part owned by the taxpayer where we still cannot sell them back to the private sector for a profit.

    • APL
      Posted January 5, 2012 at 9:56 am | Permalink

      JR: “I mean the two UK banks that are part owned by the taxpayer where we still cannot sell them back to the private sector for a profit.”

      Then, as is provided for under commercial law, close them down in an orderly manner, sell off what assets are valuable and dump the rest.

      Next, prosecute the directors at the time for trading while insolvent.

  33. The Realist
    Posted January 4, 2012 at 4:19 pm | Permalink

    John , I am going to correct a misconception re Rail travel. Your line maybe not busy ( though several of my colleagues who come in from Woking say it is). It has to be said that on my line (East Coast) the peak morning and evening travel and that includes the 1st train down from up North ie past P/boro has on average I suspect 80-90% occupancy in standard class , substantially lower in first class of course! I have worked in the private sector for 26 years or so and can’t understand why railways should be given inflation plus price increases. We have an inefficient and badly run rail system. Passenger growth has been on rising underlying trend since about ’93 even taking into account the various cycles over that period. Train fares have nearly gone up 50% in five years, we do now have the most expensive commuter fares in the world. Grantham to London incl u/ground is now £8200 for an annual season ticket, equivalent to about £13, 600 in Gross Earnings. To put it bluntly the rail companies need a period of no price rises so that they are forced to become more efficient as they run monopolies! In Germany you are even allowed to offset a fair proportion of your travel to work costs as an employee against tax. My fare equates to a 1st class whole of Germany season ticket according to my German colleagues. We are over taxed by a quasi public/private oligolopy when you take in account Network Rail and the operators who quite often have a monopoly. It needs sorting, not just the usual inflation plus price rises.

    Reply: I agree the railway needs to be made to be more efficient. I live near Wokingham, not Woking, and was not talking about my commuter lilne. Commuter lines tend to be very crowded, and mine has too few trains. I am talking about inter city routes, where I find early trains from Reading and London to places like Macnhester, Leeds, Bristol are very underused, and lunchtime trains back too are often little occupied. The last train I took to Bristol and South Wales was around 20% full.

    • Caterpillar
      Posted January 4, 2012 at 9:37 pm | Permalink

      To JR’s Reply:

      On empty passenger (rather than freight) trains presumably those who go one way typically come back the other way at a different time. So what is the empty train reason: Insufficient carriages/engines/drivers, travel pattern, insufficient network capacity?

      My guess would be some combination e.g. I can imagine the requirement to move many people in a short time window in one direction, but that the many people may wish to move in the other direction across a larger time window – running many individually low capacity, point to point trains is presumably a challenge (- perhaps subsidizing rather than taxing domestic flights might be an alterantive). Again, I have no data but presumably the DfT have this – is it poor management/planning or are there real binding constraints that need to be relaxed?

      Reply: It is likely that the numbers wishing to go one way will be similar to the numbers coming back. A train operator has to offer a timetable, as many will only use a train if there is a reasonable choice of times for the return. My observation has been how empty trains are on some of the main intericty routes early in the morning when you would expect more people to need to get there for the start of the business day – you see many more people on planes and the roads at that time- and more coming back in the middle of the day after a morning’s work. The fact that they do not implies we are not short of capacity, and implies the railway needs to do more work on promoting these near empty trains by improving the service/price etc.

      • Caterpillar
        Posted January 5, 2012 at 9:56 am | Permalink

        Thank you for reply. I think there might be two operational management issues here (i) to shift demand from one time period to another falls within yield/revenue management, but when train companies attempt to develop the requisite pricing models they are criticised by consumer groups for the variety of ticket types, (ii) there is a problem (as you recognise for return trips) that there might be more of a variation in when people want to return than the variation in the outward journey. It is the variation that gives rise to the capacity problem (- a bit like a queuing problem), so the company needs one large train, one engine, one driver and one safe slot on the lines for the outward journey but may require many for the return – if one could control when people travelled then there would be sufficient capacity, but because of the variation there isn’t.

        Nevertheless I agree that there is resource going begging – I guess though that to get most out of it might require the existence of the dreamed IT updated /coach mesh network – taking the train gives the fixed time and working environment in one direction, th coach gives the flexibiltiy for return.

  34. Javelin
    Posted January 4, 2012 at 6:50 pm | Permalink

    interesting paper showing budget cuts cause instability – but the longer you leave the necessary budget cuts the worse the instability gets. I think the key here is public trust and honesty. If the executive are forced to cut the people trust them. The longer you leave it the worse the instability.

  35. pedroelingles
    Posted January 4, 2012 at 8:02 pm | Permalink

    I agree with ChrisXP (posted at 07:48) when he remarked about VAT. The EU is already talking about the need for Vat to be extended to cover Children’s Clothing, etc., with particular reference to the U.K. I cannot believe that they will not pursue this course and ask therefore what will Cameron do about it. Politically this will be a highly sensitive matter and the Tabloid Headlines predictable. Will we be able to afford to pay the EU Fine if we do not comply or could it be met from more QE.

  36. Gary
    Posted January 4, 2012 at 8:54 pm | Permalink


    I think you mean there is not enough gold for it to be money ?

    If so, you make the mistake many do. Gold is limited by VALUE, not by WEIGHT. In other words there is infinite gold available as money, because a given unit weight of gold has no ceiling on it’s value. And while we are at it, may as well dismiss the other common myth, that people who already have gold or mine it will forever have the advantage in wealth. First, the amount of gold mined annually is a tiny fraction of the amount of gold already mined, almost all gold ever mined is still available. Second, since under a gold standard, the gold pays no interest, if you want to increase your wealth you have to invest your gold in the most profitable businesses where you can realise capital gains and dividends. So the gold will flow to the best businesses, as it should be.

    Gold is money, and has been for 6000 years , even when legal tender laws attempt to marginalise it.

    • Mark
      Posted January 5, 2012 at 1:18 pm | Permalink

      Paying for a cup of coffee with micrograms of gold is not practical. Gold is no longer money, which implies transactions usage. It is an alternative store of wealth.

      • Gary
        Posted January 5, 2012 at 4:52 pm | Permalink

        paying for cups of coffee can be done with silver. That is why there was always a bi-metal currency. Maybe nickel and bronze will also be ok for daily small transactions but would not be used a store of value. Gold is the currency of account, the store of value.

        Demand for credit would arise spontaneously, and in a free market you will find that expiring notes called Bills of Exchange , or Real Bills, will likely be demanded. These Real Bills, espoused by Adam Smith, have been very successfully used in the 19th century, and they work very well as long as they can be extinguished by a currency that everyone will freely accept as a store of value. They will be cleared for the currency of account, gold, after the transaction has completed or they will expire after a fixed number of days, probably 90. Producers can pay their workers with these bills while the orders are in progress. This ensures control over credit inflation. It is a system that forces the credit to be timeously marked-to-money. Credit is nothing more than a future claim on cash, so must be anchored accordingly to cash that in turn is anchored to the growth/contraction of the real economy. Gold fulfills this role of cash. This system ensures that no single monopoly has the sole right to issue currency, the currency itself is not a debt to anyone, and there are no legal tender laws forcing anyone to accept currency that they would rather not hold.

        There may be other ways of achieving the same thing, fine then let the market choose a system, but surely the system that we have is the worst ? Even Mervyn King has said so.

  37. john w
    Posted January 4, 2012 at 9:43 pm | Permalink

    John, i hope inflation doesnt go up.I also hope we have no more eu taxes,people have spoken about vat on food and kids clothes.I would like to say something positive about British manufacturing.I own 2 British made BSA air rifles that i use for pest control.They are very well made,they cost several hundred pounds less than a German equivilant.The gun shop sells loads of BSAs.I reckon Britian is capable of making high quality goods at mid range prices .The Germans dont seem to make anything at reasonable prices and we should take advantage of this.Many of the bloggers have pointed out that cheaper goods are flying off the shelf.I do not wish to encourage anyone to buy guns,it was the best example i could think of.

  38. electro-kevin
    Posted January 5, 2012 at 8:42 pm | Permalink

    I feel that if turn-up-and-go rail fairs were cheaper then more people would use trains at all times. My own company charges reasonable fares on local services and we are busy for most of the time. The same doesn’t seem to apply for intercity trips in terms of turn-up-and-go charges.

    There is also the issue of there being too few carriages on peak services. Surely the money likely to be spent on HS2 would be better diverted to dealing with this problem ?

    • electro-kevin
      Posted January 5, 2012 at 8:43 pm | Permalink

      ‘Fairs’ again. D’oh !

  • About John Redwood

    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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