It is inflation, not deflation, that we need to worry about

Fergus Pickering

How right you are, Fraser. Mrs Pickering has been telling me the same thing for months and she is right as usual. Of course the government wants galloping inflation to cancel out the huge debt, at least that's what Mrs Pickering says.

The Preston Park Panther

Inflation is the means by which governments steal from their citizens. Need more be said?

Chris lancashire

I coudn't agree more and repeat that a 30% sterling devaluation coupled to a huge import bill means inflation will rip. Now further stoked by the lunatic QE (money-printing).
Brown's successor in opposition will blame a Tory government for failing to control inflation. Brilliant Gordon!

Verity

Plse forgive the intrusion, but where's The Wall?

Tiberius

Well, if you're on a tracker mortgage, you won't want to jump on to a fix just yet. I think your estimate of low interest rates for a couple of years is less than six months old, Fraser!

But we do face inflation in the medium term. Look at the rise in price of imported goods. And yes, printing money is going also to contribute somewhat.

mark

This is why the currency collapse is very bad news for the UK. If the UK was a large manufacturer with low household debt levels (eg Italy), a devaluation strategy would make sense.

The problem is that we import the bulk of what we consume, and have extremely high levels of personal and government indebtedness.

If inflation continues to rise (which i would expect it to when the base effects of oil's spike to 150bucks drop out) then interest rates will start to rise.

Given that most borrowers have only had minimal interest rate cuts passed on, an upward interest rate shock coupled with high unemployment would be devestating.

The UK is so structurally uncompetitive through high taxes, low labour productivity and hugely excessive red tape that the process of rebuilding an export sector will be extremely slow. Eastern Europe has higher education standards, far less red tape, lower taxes and far lower wages. Foreign investment will not come to the UK given much more business friendly locations elsewhere in Europe.

The positive impact on the economy from the currency collapse hence is minimal.

The one thing that could pull the UK around would be Euro entry - access to a credible fiscal framework, the large eurozone deposit base and structurally lower interest rates would hugely support the household sector.

However, the appalling state of the UK's public finances means that the idea of joining the Euro is probably off the table for at least a decade.

A very long period of austerity is now in store.

Pete Hoskin

Verity: it's up now. Thanks for the reminder - was a hectic day yesterday...

TrevorsDen

Correct Mr N.

The governor did hint when questioned in parliament that they would have to put interest rated up if they thought there was inflation in the pipeline. But of course it is still here pouring out of the nozzle.

Right now to my untutored eye - QE looks wrong and the inevitable rise in interest rates will stunt the normal level of growth we could otherwise expect. And on top of this we have the dead weight of debt and high spending.

And laughable Maguire on SKY news was predicting a quick recovery

Fraser Nelson

Tiberius, you're right - six months ago that was my view, and the market's. But there have been several signs recently that inflation may kick off, probably mid-10. Until we know Brown's intentions with QE it's very hard to tell. I just saw the IMF report on te net coist to the UK of the banking crisis - 13% of GDP! NO other G7 nation will be hit, and this isnt even on the books. Much to get nervous about.

Publius

Absolutely. And yet, once again, the mainstream media all seem to have fallen for the we're-in-a-deflation-spiral spin.

This is what we have come to expect from Labour. Lie through your teeth. Deceive. Treat the electorate with cynical contempt.

Roger Thornhill

Spot on Fraser and this has been my position as soon as the daft idea of QE was floated. It is theft, pure and simple.

Funny how they now include house prices when it suits them.

What is so depressing is that so few MSM bods call the government on this one and let the "deflation" lie ride.

As far as I can tell, we are being set up for either a scorched earth Tory term or Euro entry on VERY bad terms.

Gordon will be heading for a sinecure at the ECB for all he has done for the Marxist/Fabian Project.

mark

Quantitative Easing is simply printing money to finance the government.

Normally when government debt gets too big, the interest rate paid on it needs to rise to attract enough capital (see canada/australia early 1990s). It is normally this which causes government to start cutting government spending to bring the amount of debt under control.

The problem here is the same use of an ultra narrow central bank mandate. As Fraser has regularly pointed out, focussing only on inflation to the exclusion of any other macro economic variable creates huge distortions.
By telling the bank to focus just on inflation - and taking on half baked and untested ideas like QE - Brown can try to subvert the normal market restraints on excess debt by claiming that government financing costs are being kept low to fight deflation.

This falls apart if either inflation starts to rise excessively (as the CPI detail is warning of) or confidence is lost in the currency. At that point it's call the IMF time.

The UK is potentially going to print money to pay for up to 25% of government expenditure. In Weimar days about 50% of Government spending was financed by printing money.

This is nothing to do with trying to help those with mortgages or small businesses with high overdraft costs - it's entirely to cover up the scale of the government debt problem and the huge black hole in the banking system that stops bank of england rate cuts being passed onto borrowers.

The cost of this will be felt for a generation.

Tiberius

Surely, Fraser, even Brown is hemmed in on further QE, following the IMF report and King's performance before the Committee. The tap may be on full now, but Brown will have difficulty politically in replacing the waste pipe with one twice the diameter.

Frank O'Connell

Google in ''Deflation & Liberty ''
a wonderfulpaper by the Mises Institute.

Forlornehope

Of course inflation is how governments get rid of debt. Ten years of 4% inflation brings the total debt down to under 70%. Add in around 2.5% normal growth and you have halved debt as a percentage of GDP. Of course if all your debt is index linked you are stuffed!

It doesn't need either very high rates of inflation or growth to achieve this. All it needs is good solid conservative management for two parliaments (the small "c" is deliberate). By that time most people will have forgotten the mess Labour made and will be ready to give them another go. What fun!

Fraser Nelson

Tiberius, technically that seems to be right - the BoE gave themselves this weird three-month deadline to dispose of the first tranche. But since then the picture has changed. Andrew Sentence, an MPC member, said this today "The recent data suggests that the downward momentum of inflation in the short-term may not be as strong as we thought in February – probably because of the very marked depreciation in sterling since the summer of 2007"

john miller

Deflation? Puhleeze!

The factory is already set up to produce hyper-inflation. Negative interest rates, huge government spending and money supply being boosted by printing the stuff like there's no tomorrow and using it to buy government bonds.

Yeah I'm terrified of deflation. In 3002 perhaps. But for the next 10 years we are going to have double digit inflation.

The sad fact for the Tories is that it will really boom after their next term.

In 2015, when you are on the national average wage of £60,000 pa, paying 60% tax on £10,000 of that and an average of 30% on the rest, you'll be quite happy, because your 3 bed semi will be worth £500,000.

Don't even think about buying veggies from the Eurozone, or any computer kit. But the all in one home grown cuppa soup will supply all you nutritional needs and the State gin will keep you in the right mood...

TGF UKIP

When is Mervyn King going to "come out" and start wearing a Labour rosette?

Aless Bieri

Fraser, you say that if not for the VAT cut inflation would be closer to 4.0% but surely the reduction of VAT from 17.5% to 15% must raise prices?

graph here:http://aless.co.uk/affect_of_vat.jpg

nick

RPIx (RPI excluding mortgage interest) is at 2.2%. Clearly this so-called deflation is almost entirely down to the excessive interest rate cuts made by the MPC under pressure from Downing Street, which have punished savers, been of no help to those renting or with fixed-rate mortgages and rewarded the reckless borrowing that got us into this mess.
Strange that the Government ignored RPI when it conflicted with their policy of pumping up an unsustainable housing bubble, yet now it's back in fashion when they're trying to justify devaluation by stealth and printing money. Mandelson is already trying to soften us up for a visit to the IMF. Hang on tight - it's going to be a bumpy ride.

JohnAnt

"If it hadn't been for the VAT cut, CPI inflation would be closer to 4 percent." Which is why Brown decided to go for it, despite the absurdly high cost and low benefit - a cheap way of preventing the true, high inflation figures from becoming too obvious.

JohnAnt

Fraser - I don't care how many trillions we owe, I refuse to let you get away with using 'hurting', a transitive active verb, when you mean to use the passive voice of 'hurt', i.e. 'are being hurt'.
And yes, it matters more than the entire National Debt.

JohnAnt

If interest rates do rise, then at least those of us who are without debts, and who've not fled the country with our capital should be able to get a decent rate of savings interest at the banks.

Forlornehope

JohnAnt, check the real rate of interest, nominal less inflation, and it won't look so good. During the high inflation of the 70's real interest rates weren't just low, they were negative. The best bets during high inflation are property and equities, which both tend to overcompensate.

Promise of Avalon

"Costs are rising in Britain, wages are being frozen and people are hurting."

Of course they are. We are all getting poorer, rich and poor alike.