Inflation nation
Mark Bathgate 8:44pm
The inflation surge is now upon us. The CPI rate again “surprised” to the upside – Britain is the only major economy in the world to have inflation doing this. But given that the Bank of England’s printing presses have been working overtime to fund a fiscally irresponsible government then little wonder things are different here. To understand just how unusual the UK situation is, consider the below graph: despite suffering the longest recession in G20, we have one of highest rates of inflation in the developed world.
The next few months will see this push higher, potentially reaching 4 percent in March and busting the 2 percent target. Without the temporary VAT cut, inflation would never have dropped below the 2 percent target rate the Bank of England is mandated to follow – so, in a way, the VAT cut helped Brown justify turning on the Bank of England’s printing presses. It helped provide cover for the “independent” Monetary Policy Committee to fund the government deficit through money printing, but now the inflationary price needs to be paid. The pound fell sharply through the latter part of last year as the scale of the UK’s fiscal and banking problems became clear, and the intention of the Government to use the printing press to fund spending became apparent. With the manufacturing sector halving in size since 1997 (and they blame Thatcher for hitting manufacturing!), the UK now imports most of its consumption.
Why does all this matter? Well, sterling has fallen by about a third versus the Euro since the beginning of the banking crisis in July 2007 (see below). As our currency falls, the costs of imports rise – passed on to consumers. If we are to maintain inflation stability (as per Brown’s target) domestic prices have to decline – so net result is wages stagnate or fall, while the cost of living rises. This causes living standards to decline. And this spells misery.
So, memo to Brown: this is why most properly-run countries chose to sort out government debt problems rather than revert to the oldest tool in the central bank toolkit – debasing the currency to cover government debt problems. A nightmare scenario looms for Britain.
All told, David Cameron’s comments in his conference speech that printing money was the wrong solution to the UK’s debt problems and risked inflation are looking increasingly prescient. While the usual suspects lined up to deride his economic ignorance, the facts increasingly bear out the disaster that the Labour’s print and spend policies are about to unleash.
Previous
Peter From Maidstone
December 15th, 2009 8:57pm Report this commentOrdinary people did not hear Cameron's prescient comments in his conference speech. If he wants to be heard he needs to get angry on our behalf. Why is he not nailing this sick and sorry Government into the ground? Is it because he doesn't really care that much as long as he gets his turn to be PM? I really hope not. But if he does not destroy this Government now then he does not deserve a chance at the coming GE.
We are not being heard. If he will not voice our anger then he does not deserve to represent us.
TrevorsDen
December 15th, 2009 9:14pm Report this commentProm M - in a highly publicised conference speech Cameron laid out the facts -- and all you can do is blame your own ingnorance ands assume the rest of the public are as tbhick as you.
Why when every bit of bad news of what labour have inflicted on Britain comes out do you and the usual crowd of fellow travellers immediately go into a hysterical anti cameron tirade?
We have a Labour majority govt with an institutionally left wing BBC cheerleading it. Just pull your finger out and vote effing Tory at the next election and put an end to all this.
toco
December 15th, 2009 9:15pm Report this commentQE and non attention to Government debt just increases the likelihood we are in for a rough ride due to the incompetence of Brown,Balls ans Yvette('don't call me pretentious')Cooper who spent their joint time at The Treasury perfecting their particular expertise in financial ignorance.'The three dangerous monkeys' springs to mind.Brown gets into the Guinness Book of Records twice as the worst ever Chancellor and an even worse PM.
oldtimer
December 15th, 2009 9:28pm Report this commentClearly the UK is back into its "sick man of Europe" mode. Listening to Geoff Randall Live this evening about all the businesses and their well paid staff getting out, or planning to get out, of the UK suggests that many in the City and corporate tax payers will not be around to pay the bills the way they used to. Even the Diageo boss says he is looking at all options. With only 9% of his sales made in the UK, why should Diageo stick around for the UKs uncompetitive corporate tax regime? If the Conservatives fail to win a working majority and implement tax reform, the trickle will become a flood.
Olaf Rye
December 15th, 2009 9:33pm Report this commentWhy is such chilling, and profoundly significant news, not on the front page of every newspaper and the lead story on the evening news programmes ? It is either because the media is gutless, or the public is just too ignorant to appreciate the disaster that another socialist has inflicted on the British economy.
James
December 15th, 2009 9:54pm Report this commentAnd Brown is too busy 'saving the world' at Copenhagen to face the music at PMQs.
I almost hope he wins the election and has to sort out the mess.
Edward Sutherland
December 15th, 2009 9:56pm Report this commentAn excellent post, Mark. But this needs to be shouted from the rooftops-as Olaf points out- so that the whole country at long,long last becomes aware of the complete disaster Brown has brought upon us over the past twelve and a half years.
General Zod
December 15th, 2009 10:07pm Report this commentOh, what a surprise! I am gobsmacked. Printing money by the hundreds of billions has caused inflation.
I was just so terrified of the dread spectre of deflation.
Malfeasance in public office should not be difficult to make stick.
tonyp17
December 15th, 2009 10:11pm Report this commentInflation was always going to occur - it has only been kept under wraps by dodgy CPI statistics. All those 'experts' forecasting deflation were probably on the Government payroll to try to back up yet another scam.
The mind boggles at the number of ways Brown and his troops try to con the public.
It is now up to the press to drum home the nonsense being spouted each day.
Holly ......
December 15th, 2009 10:14pm Report this commentLove being the anorak here.
I heard Cameron AND Osborne.
Like I said yesterday on another site foresight is better than hindsight.
The left hate Osborne because they are crap and he is...erm....NOT.
On the other hand IF Labour do by some miracle get in again, just watch the riots when the benefit culture is STOPED DEAD IN IT'S TRACKS.
Looks like coop is stopping the disgusting rent payments. And so it has started.
Defence cuts.
20% cuts in other departments.
Balls stamping his feet to get MORE.
A raise for pensioners that is only a fraction of what was implied.
Labour are blooming great?
Let them vote Labour,can't bloody wait.
Sam ARMSTRONG
December 15th, 2009 10:45pm Report this commentJIM CALLAGHAN MK II
But without any charm whatsover.
john miller
December 15th, 2009 10:56pm Report this commentI really suggest Coffee Housers drag themsleves into the 21st century and practice modernthink.
In much the same way that falling temperatures are proof that global warming is a real and present danger, such that we only have 2 days to save the world (copyright G Brown), the rising CPI illustrates perfectly that we are staring the threat of ruinous deflation in the face.
Although I have termed this method "modernthink", it has, in fact been practiced for centuries and came in quite handy for such diverse bodies, from the Spanish Inquisition through to Scientologists and latterly, sad to say, the Royal Society.
Steve Tierney
December 15th, 2009 11:01pm Report this commentAnybody who knows anything about real economics knows that massive money printing = inflation. The Keynesians will waffle laying technical terms atop one another to pretend this is not true, but those of us who predicted this result will, unfortunately, soon be able to say: "I told you so."
TGF UKIP
December 15th, 2009 11:22pm Report this commentWhat is striking is the similarity, not just in the inflation graph above, between the UK and the US. Both governments, especially the US, being in the hands of dedicated marxists and both seemingly bent on the destruction via debt, regulation and taxes, of free market capitalism.
Certainly, while the pound declined against the dollar from above the $2 mark right down to $1.37, it has been stable now for some months at above $1.60 while both sterling and dollar have languished against the euro.
I would be surprised though if this situation continued deep into 2010 so the question becomes which is the more likely the pound dropping steeply against the dollar or vice versa. If the former then we really are screwed on the inflation front given the pricing of most imported commodities being in dollars.
Do any of the City boys, Short UK etc, have a view on the more likely scenario and how much difference will a UK Tory win and a GOP US congressional win actually make.
Tom Pride
December 15th, 2009 11:24pm Report this commentI commented back in March this year:
“Sceptics like myself believe that whatever the intent of QE, Gordon Brown is going to use it to fund the deficit so he does not have to cut spending or raise taxes ahead of the election. The QE supporters have given him the keys to the printing presses. Only the integrity of Alistair Darling and the Treasury civil servants stand in his way.”
Well , Darling got flattened last week. So here we go . . . .
Fergus Pickering
December 16th, 2009 3:59am Report this commentI'll do without saying 'I told you so'. Don't look forward to Brown clearing up his own mess, because he won't. He doesn't even have the excue of General Galtieri of being drunk. I've never so sincerely wished a man dead.
Peter From Maidstone
December 16th, 2009 7:55am Report this commentTrevorsDen, why is it hysterical to point out that Cameron is not getting through to people - and doesn't seem to be making any effort to do so. You can abuse everyone else who disagrees with you if you choose, but that won't win the next GE.
If Cameron IS more of the same, then it does seem to me that democracy has broken down completely. But he has plenty of chance to show that he is not the same. He is not doing so just yet.
Frank O'Connell
December 16th, 2009 8:43am Report this commentThe US ppi is up 1.8% for November
Nicholas
December 16th, 2009 9:16am Report this commentNah, don't worry. Simon Cowell is going to rescue us all. Once the brain dead morons who pass for 80% of the British public start voting government by TV the economy won't even factor. In fact it will be an ex-factor. Public life will be all about relationship ishoos, weeping in public (but not ruining the mascara) and piling up flowers and little teddy bears when anyone dies, jar no wha' I mean?
Chris lancashire
December 16th, 2009 9:29am Report this commentJust to add anectdotal evidence, as a UK manufacturer and importer (and exporter), we are now suffering weekly price increases from UK suppliers and a declining £ gives us effective overseas supplier price increases. We are passing these on with a 4% price increase in January.
This is obviously replicated across the UK; 4%+ inflation is actually already here, it just hasn't fed through to the RPI yet.
JR
December 16th, 2009 10:57am Report this commentYes there are a lot of reasons to dump on the Government but most of this article is rubbish.
Inflation is below 2% not 20% and a lot of our imports are done in dollars and other currencies not euros. There's no evidence from that graph that the VAT cut impacted on inflation compared to international comparisons - the drops in inflation are comparable.
QE coming to an end next month and causing a deflationary shock is probably a bigger threat.
denis cooper
December 16th, 2009 11:11am Report this commentTrevorsden, the Conservative conference was in October, while the Bank of England made its first purchases of gilts on March 12th.
In fact even before the Bank actually started to buy gilts, some of us were asking "Why is the Bank of England going to buy gilts?"
Back in January the media were mooting that the Bank might use taxpayers' money to buy up "toxic assets" and remove them from the financial system.
But by the time the Asset Purchase Facility was set up, that had morphed into buying up not "toxic assets", but good quality assets like gilts, and using money borrowed by the Treasury:
http://www.bankofengland.co.uk/markets/apf/index.htm
"In January 2009, the Chancellor of the Exchequer authorised the Bank to set up an Asset Purchase Facility (APF) to buy high-quality assets financed by the issuance of Treasury Bills."
Then before that nonsensical project had even got started, it was further transformed into the Bank buying up gilts using newly created money, which started on March 12th.
In the days just before and after there were several exchanges about this on this blog, between yourself on the one hand, and Tom Pride and myself on the other.
On March 13th you wrote:
http://www.spectator.co.uk/coffeehouse/3437551/darling-has-money-troubles.thtml
"You keep saying this Mr Cooper but I have yet to see a financial journalist who says this is what's happening ... But come on Mr Cooper - show us sources other than you which are making the same predictions."
As Holly says, "foresight is better than hindsight"; I'm only an amateur who thought that the official story being pushed by almost all of the media made no sense; given that Cameron must have access to professional advice, the fact that he caught up seven months later does not impress.
Rachael
December 16th, 2009 11:27am Report this commentReliable people have been screaming about this for over 12 months.
Liam Halligan in the Telegraph has screamed until he can scream no more:
http://www.telegraph.co.uk/finance/comment/liamhalligan/
Hardly anyone in the City seems interested. They have joined in the nonsense about deflation.
And Richard Littlejohn has bellowed about Brown’s vindictive streak being as big as the width of the Firth of Forth.
This is what he means: total scorched earth.
The responsible of society, the people who save, are being torn to shreds because of Brown & Co’s hatred for Middle England.
Do something, Dave.
Stop the punishment of the building societies who are being taxed extra to help bail out the banks’ profligacy and being undercut by better deals offered at state-owned banks (less bad headlines if job losses go to the building societies and not Brown’s mess of state-owned banks).
Some in the City may like to actually read Liam Halligan’s columns of the last 12 months and stop this madness.
It is a total disgrace.
Fox in a box
December 16th, 2009 11:34am Report this commentJR
what rational basis, or evidence, do you base your deflation assertion on?
Edward Sutherland
December 16th, 2009 12:13pm Report this commentMark: a Christmas jingle for the No 10 Christmas card:
Have yourself a Gordon Brown Christmas,
Binge yourself on credit and debt,
Have yourself a Gordon Brown Christmas,
Moody's downgrade? A surefire bet!
Lance Grundy
December 16th, 2009 8:54pm Report this comment@ Rachael
Agreed. Liam Halligan has been essential reading since the credit crunch hit.
He was warning that Inflation is the greatest danger to the British economy back in February of this year. At the time, as he notes, he was described as "bonkers" and his argument dismissed as "absurd".
He who laughs last...
Giles Wilkes
December 17th, 2009 11:45am Report this commentYou are all wrong, you inflationists, and fail to understand base level effects in your hysteria about inflation. If you want some graphs, here they are:
http://freethinkingeconomist.com/2009/12/17/base-effect-or-why-the-right-will-be-screaming-inflation-even-as-we-go-into-deflation/
There is no reliable relationship between base money and inflation, and the last year has shown that in spades
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