King's inflation nation

alexsandr

isnt inflation a device used by governments to devalue their debts?

Mike Thomas

Fraser,

Our base rate serve us for one main reasons.

To stop mortgage default and prop up the housing market.

After all, what percentage of lending does it represent to the banks?

Rather a lot.

We have had nothing like the number of defaults on mortgage as we did in 1990/1/2.

The base rate is being kept there to provide enough breathing room for people to deleverage.

A little inflation cannot do any harm either in inflating debts away either.

What wasn't planned for was that employers are also taking full advantage to lower their wage bills.

In short, the wise and cautious are being penalised in favour of the wreckless and irresponsible.

PuppetMaster

Fraser, stop being so willfully gullible. The BoE is not 'paid to tame inflation', they are paid to create inflation of about 2% per annum, as you write in this piece. Add that up over ten years and that is a sizeable reduction of the purchasing power of your notes.
Inflation is just another tax, the government is taking this money to bail out the banks and the welfare state, if you don't like it, tough. Stop complaining and pay your taxes like a good slave.

Commentator

Yes Fraser you are right....but remember also that King is doing the bidding of his de facto master in the Treasury. The Coalition wants inflation to stay high so that the UK effectively defaults on much of its debt, because otherwise it hasn't the remotest chance of repaying it.

mal

Nothing puzzling about it. This is indeed their policy and King, Brown and Cameron have all colluded to lie to the British people. Ironic that those who say cut now or risk deeper cuts tomorrow, do not apply the same logic to interest rates. All those on low or fixed incomes are seeing their living standards dramatically fall - sacrificed if you like. Our current leaders are not worth the title and are little better than the bunch of charlatans that preceded them.

Rhoda Klapp

Overall shop retail prices are claimed to have gone up by 2.1%. Of course you can cherry pick examples which are worse, but the current inflation is largely stemming from fuel prices in which the govt has a big hand and form commodity prices internationally, combined with a falling pound. Kneejerk rises in interest will not fix it if the inflation is in things which are not optional purchases. They will still rise, but any growth in the economy will be strangled at birth. Stagflation, I think it's called.

charles hercock

Now we see the perils of quantitative easing.Get the interest rates back to 5% where we are historically confortable

denis cooper

Another article sticking the knife into Mervyn King, as he was making these interest rate decisions on his own.

Here are the members of the Monetary Policy Committee:

http://www.bankofengland.co.uk/monetarypolicy/overview.htm

Mervyn King, Governor
Charles Bean, Deputy Governor
Paul Tucker, Deputy Governor
Spencer Dale
Paul Fisher
David Miles
Adam Posen
Andrew Sentance
Martin Weale

And:

"Each member of the Committee has a vote to set interest rates at the level they believe is consistent with meeting the inflation target. The MPC's decision is made on the basis of one-person, one vote. It is not based on a consensus of opinion. It reflects the votes of each individual member of the Committee."

So what do you think, Fraser, that King has Rasputin-like powers to control the other eight members and compel them to vote as he wants?

Isn't it time that you desisted from this increasingly ridiculous personal vendetta?

Fatbloke on tour

Trevor

It just gets worse and worse, we have inflation because we have reduced competition on the high street and a very well organised campaign to get inflation on all thye news agendas.

You are right to highlight the higher inflation in the UK at a time of stable exchange rates but your remedy would be worse than the disease.

Consequently focus on why at this time of low demand with other falls on the way over the next 6-12 months we should be aiming to lower demand further by increasing interest rstaes and taking spending power out of people's pockets?

We have inflation because the increases in raw materials and input prices is being amplified by the retail sector with the help of a compliant media running stories about it.

Ask the right questions to the right people, what is the raw material cost of a loaf, what is the wholesale cost of a loaf and how much does the "Big 4" sell it for.

Sort that out and you will understand who is benefitting from all this talk about inflation.

Augustus

You can only use inflation as a way of increasing competitiveness (by reducing real wages), and to reduce debts for so long. Once it is generally expected to rise
annually into the future the genie of wage-price spiral is out of the bottle and we're bact to the mid 1970s. The BoE has good grounds for being nervous.

Tiberius

Do the terms "cost push" and "demand pull" inflation still get used in lectures on economics?

You might think the latter type could be tamed by higher borrowing rates, but the former (which is what we are experiencing now) will surely be made worse.

denis cooper

"... with inflation at 3.3 percent or 4.8 percent depending on how you measure it."

As far as MPC decisions on interest rates are concerned, there is only one way to measure inflation.

That's the way that Gordon Brown laid down in December 2003, which is to use the EU's Harmonised Index of Consumer Prices, HICP, or CPI as it's now camouflaged.

Members of the MPC may have their doubts about whether this is the best measure of inflation to use when setting interest rates, and indeed in this January 2004 speech King voiced such doubts:

http://www.bankofengland.co.uk/publications/speeches/2004/speech211.pdf

"From May 1997 the target was 2½% for RPIX inflation. But in December the Chancellor gave the Monetary Policy Committee a new target for inflation. It is 2% as measured by the Consumer Prices Index or CPI, formerly known as the Harmonised Index of Consumer Prices."

"In this respect, the difference between RPIX and CPI inflation as a measure of the economic temperature of the economy is rather like the difference between Fahrenheit and Centigrade as a measure of physical temperature. In both cases moving from one measure to another changes the number without there having been any change in the temperature itself."

"Unfortunately, there is an additional complication. Unlike the translation between Fahrenheit and Centigrade, the difference between RPIX and CPI inflation does vary with the economic temperature. That is because the "formula" effect is not the only difference between the two measures. RPIX includes both house prices and Council Tax. Those items are omitted from the basket of goods and services used to construct the CPI."

"Of greater significance than the average difference between the two measures in the long run is the observation that the gap between them varies over time, often quite widely, in line with changes in the temperature of the economy in general and house prices in particular."

But whatever doubts King or other MPC members may have about the wisdom of using HICP or CPI as the measure of inflation, that is the measure they have been told to use and legally it is not open to them to use any other measure.

Simon Stephenson

Commentator : 12.55pm

Exactly right.

In our economic situation, and with political power being where it is, stealth default through inflation is just about the only ameliorative policy which isn't going to be knocked on the head by one pressure group or another. That any party in power will be promoting it should be taken as automatic.

If we'd experienced a Weimar, it would be a different matter, of course, but the general public is so fed up with the dishonest behaviour of leadership in recent years that it no longer takes seriously the warnings of genuine experts - because it can no longer tell who is being genuine, and who isn't.

Percy

Keep it up Fraser, King needs to be exposed for the coin clipper he really is.

decafT

this idea keeps coming up but most of the government's debt is tied to inflation anyway.

Fatbloke on tour

Trevor

And another thing, who were the muppets that decided to raise VAT at this juncture when the GB / AD recovery was starting to run out of steam due to criminal neglect, inflation is already an issue and the slash and burn fest is about to start.

You need to start looking at the root causes behind inflation:

1) Manipulation of raw material costs, the usual supects are working the markets to generate an income / surplus for themselves even though they add nothing to the process and produce nothing themselves.

Speculation is bad.

2) Structural in-efficiencies in the high street made worse by the recent cull of shopping brands. Less choice equals less competition even before the real estate strategies come into play.

Love the Next / Wolfson response to this, stick up the prices by 8% and hope for the best.

3) Criminal incompetence from the dog boilers running the economy, putting up VAT at a time of pricing froth in the market was a big mistake. Although what did we expect, you don't pay VAT if you are in the market for a grouse moor.

At a time when reasons to question their financial and economic competence are becoming a daily occurence, the VAT rise looks bad for Dave the Rave and Sniffy.

Cut and run in May?
It will soon be their only hope.

Cleggy is being forced to wear slip ons, Dave the Rave's "Nice" act has collapsed and the backbenches are starting to wake up.

Has anyone seen DD recently, I have been told he has to go through doors sideways, so large is his smile.

denis cooper

"There is a theory in the City that King has decided to allow inflation to soar, judging that the greater risk to the economy is jacking up interest rates. And that he wants to do this on the sly, trying to keep the cost of borrowing low by making out that the inflation is a blip. But to do so, he'd need to change the remit of the MPC. How can they all turn a blind eye to the very inflation they are paid to tame?"

1. Once again, King has just one vote on an MPC of nine voting members, and he alone cannot "decide to allow inflation to soar".

2. On the other hand, it is King alone who has to write letters of explanation to the Chancellor if CPI moves outside the 1% to 3% range, so how do you think your hero Osborne would respond to letters explaining why inflation is soaring?

3. Once again, it is simply not open to King to "change the remit of the MPC", the objectives of which are laid down in general terms by law, the Bank of England Act 1998, and are then specified in detail by the Chancellor in accordance with that law.

Are you really this obtuse, Fraser, or do you have some party political motive for shifting all the blame away from Osborne and onto King?

TomTom

Well if high-powered money is being created at such a clip and Gilts funded by QE we are rather like Portugal. The aim of Government policy is to stimulate Inflation - it is their only policy to rescue the banks by preventing a meltdown in their property loan assets.

We will however have street politics becoming very vibrant as the conspiracy continues. Britain and the USA are engaging in currency debasement and destruction of savings to create yet one more stimulus package for banks.

This has been going on for over a decade, each stimulus designed to ward off writedowns on balance sheets. The USA has lived on Greenspan monetary boosts and Bush's fiscal boosts for weapons and reduced taxes to avoid the day of reckoning.

Britain is just another island with a bloated financial sector serving foreigners and a large peasant population to till the fields and run the tour buses. Creating a bit of unemployment is necessary to keep them servile and immigration and job cuts will keep them keen - to work for anything rather than lose their homes

Fatbloke on tour

Tibby @ 1.25

Spot on my good man.

This is all about cost push inflation.
Demand is weak at the moment unless you are a hedgie trying to turn a trick by making the poor starve, then demand is very high and prices will rise even if they have to spoil some of their own stocks.

Supply and demand for real men.
Capitalism at its most raw and dangerous.

In that case they are actually worse than a "dog boiler" in that their endeavours do not provide the poor with that option.

Consequently sasino banking and market rigging are the true enemy not the numpties in the Tory led ConDem coalition who are only their to provide a political and moral beard to the coin clippers.

Edward

Thanks for the MySupermarket information. I've started saving receipts for examination in a year's time to check inflation (yes, what a loser) - but with information like this I might not have to bother.

Only thing is I couldn't find it on their website - could we have a more direct reference? And does anybody know of overseas (particularly American) equivalents?

Commentator

Tiberius clearly fancies himself as a bit of an economist. Cost push inflation stimulates demand pull inflation. That is exactly what happened in the 1970's. Nothing was done about it until too late. The same mistakes are being made here....unless of course you think that in the 1970's, inflation should have been allowed to rage unabated.

yank

PuppetMaster
January 13th, 2011 12:53pm

Fraser, stop being so willfully gullible. The BoE is not 'paid to tame inflation', they are paid to create inflation of about 2% per annum, as you write in this piece. Add that up over ten years and that is a sizeable reduction of the purchasing power of your notes.
Inflation is just another tax, the government is taking this money to bail out the banks and the welfare state, if you don't like it, tough. Stop complaining and pay your taxes like a good slave.

.

I just thought I'd repost PuppetMaster's original, in case the Spectator missed it the first time through.

Nice to see the Spectator at least put in a mention of "Osborne's VAT rise", though. It's a start. Perhaps you'll eventually get around to relevant commentary on these matters. We can hope.

Hugh Janus

"Isn't inflation a device used by governments to devalue their debts?"

Indeed it is, as many savers will testify as they watch their nest eggs shrinking rapidly. Two thoughts: the Governor and the MPC, as I understand it, are charged with holding inflation at 2% or below. In that aim they have failed spectacularly. It is not for them to decide whether inflation should be allowed to run out of control for any particular reason.

Secondly, they are not part of government but are required to act independently and objectively when setting interest rates so that this target rate is achieved without government interference.

We are going to pay a terrible price for failing to control the demon that is inflation - and so should the MPC.

Fatbloke on tour

Comme @ 3.13

Tibby can be the man he is, you on the otherhand are so of the mark it is laughable.

Cost push and its near cousin profit push inflation is the issue at the momen, demand push is a seperate entity that gets involved when we all too much of the same thing.

Given the current state of demand in the UK and the way things are shaping up in the future it is not something to be worrying about any time soon.

denis cooper

Hugh Janus -

But I don't see any mechanism whereby the members of the MPC can be made to pay a terrible price for failing to control inflation.

Beyond not having their appointments renewed, which for most of them wouldn't be a serious blow.

Not unless they were prosecuted for "misconduct in public office", but if that was to happen to them then arguably it should also happen to the Chancellor.

Marcher Baron

"A little inflation cannot do any harm either in inflating debts away either." Extremely naive, Mike. If you are a pensioner or on a fixed income you are stuffed. I'd call that extremely harmful. Likewise, those genuinely prudent people with savings and no debt are being shafted. to bail out the reckless and feckless. Shameful.

Charlie the Chump

I was taught that changes in base rates took 18 months to work through so we're talking mis/late 2012. Growth may turn out to be 2% this year but with inflation persistently at 3% plus(despite Roger Bootle on Today expecting a massive drop in inflation in 2012 - the drop is always a year away!) and with £200bn QE washing around the system inflating equities and god knows what else, a small rise of 0.25% to 0.75% would make virtually no difference in economic activity but would lay down a significant marker for the future and restore the lost prestige of The Bank.

Those of us who remember mortgage rates at 15% shudder. Also, how did I manage to pay my mortgage then anyway?

Baron

Mike Thomas @ 12.51 sussed it up just right except that keeping the cost of money down helps not only those on mortgages, but also the banks. They can borrow at 0.5%. lend out at 5% and above which makes wonders to their balance sheets.

Fatbloke on tour @ 1.44: sir, could you slow down on the pseudo-Marxist rhetoric, talk in a language that makes sense, please.