The inflation crisis deepens

Will J

It's true and much more should be made of this. Either the government should change the target, or it should sack the man who has been so incompetent at hitting it. Anything else is simply disingenuous.

In no other job could someone so badly miss their clear target so often and still maintain the confidence of their employer.

Frank Sutton

Could this be something to with QE kicking in?
Well, what would I know of such things...

Tom Brammar

Fraser, we must be cautious not to perpetuate this myth that quantitative easing is a significant cause for the higher inflation that we're experiencing. QE's job is to counteract the wealth destruction that takes place during the popping of a credit bubble. If you consider the amount of money/wealth lost via asset price depreciation and through the collapse in the finance system then the amount the BOE has created for QE pales into insignificance.

This higher inflation reflects a world of increasing prices (food prices are rising globally etc.) as the cost of capital increases - it is not localised to the UK. We're living in a much more uncertain world now and the cost of capital has been artificially low. This is begin to change.

I think there's a fair chance we will see a significant rate rise this year - On both sides of the Atlantic.

jay mason

£70 for your car isn't too bad I am paying £350 to fill an HGV tank that last year cost £270 and that will have to go straight to the customer

The Preston Park Panther

The government has no chance (or intention)of paying off the debt, and inflation is the tried-and-tested way of defaulting on it. What more need be said?

DavidDP

Any rebuttal to the Ernst & Young Item Club which essentially rubbished your concerns?

Nick

Fraser, you keep asking the same question about why inflation is so much higher in the UK than it is in most of Europe, and you keep getting told the answer.

It is the delayed effect of the very large collapse in sterling two years ago. 20% fall against the euro, 25% fall against the dollar and 40% fall plus against the yen, aussie dollar and other asian currencies.

As the UK is so dependent on imported goods (and this could eventually change) then it isn't in the slightest surprising that inflation is so high.

Until the UK consumer stops buying clothes manufactured in Asia, or electronic goods manufactured in China or wine made in Australia this will continue.

Alternatively, a 10% strengthening of sterling, would do wonders for reining in inflation. But at the expense of a manufacturing and export-led economic recovery.

Anthony Hilton writes well on this today in the Standard. As he says - 5% inflation and 5% unemployment is better than 1% inflation and 9% unemployment.

Simon Stephenson

"This is a well-used but morally deplorable formula, which in effect transfers wealth from savers to borrowers"

When are we going to read about the effective transfer from borrowers to savers that has been going on during the low-inflation of the last 20 years or more? This process works both ways, you know, Fraser. What about all the people whose paltry savings over the years have been transformed into king's-ransom pensions through above-inflation returns on their tax exempt funds? What right do they have to see such an enhancement to their wealth for so little effort?

Isn't it at least arguable that savers have been pampered so much over the last 20+ years that an equitable re-balancing of the scales between borrower and saver is well overdue?

denis cooper

"And the RPI index, which the nation called “inflation” until Gordon Brown asked the media to use CPI instead ..."

Strange way to put it ... in December 2003 Brown told, not asked, the Governor of the Bank of England that the Monetary Policy Committee must stop aiming for his previous inflation target expressed in terms of RPI-X and start aiming for an inflation target expressed in terms of CPI, which is in fact the EU's HICP, Harmonised Index of Consumer Prices.

Hugo Chav

Fraser,

Have you read Nadeem Walayat's "Inflation Mega Trend" analysis? He has been the best forecaster "blog wise" I've come across in recent years!

http://www.marketoracle.co.uk/UserInfo-Nadeem_Walayat.html

The BoE are liars, their "deflation" propaganda was immoral. They screwed up the money supply in August 2005 and we are now cursed with their legacy of too much debt in the public & private sector.

Percy

When the emergency rate rises come, and they will, expect the berk King to announce that he didn't see that coming.

denis cooper

It probably doesn't make much difference at this particular time, but the previous 2.5% target was for RPI-X, not RPI.

denis cooper

The open letters from the Governor to the Chancellor, and the open replies from the Chancellor to the Governor, may be read here:

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

I assume that the Governor is due to send his next letter in the middle of February, and it will be interesting to see not only what he says but also what the Chancellor says in reply.

Osborne evinced no concern about rising inflation in his last reply, dated November 16th.

Craig Ryan

Fraser, I think you may be overestimating the extent of "small people's" savings. Your "commentators and policymakers" may have big mortgages but they also have high salaries and often substantial savings and investments, as well as massive equities in their houses.This will certainly be the case with people in the City clamouring for higher rates. Most ordinary people face steep mortgages (because of our ridiculously high house prices) on meagre salaries which aren't going rise any time soon. They probably have credit card debts and car loans. Many would prefer some inflation to hikes in mortgage and loan rates.

I know quite a few "small people" (do you?) and none of them have any significant savings. They do all, however, have votes.

Naomi Muse

If he were prudent, there would have been a rise of half a percentage point last week.

It means that the first rate rise will be one percentage point, which will make accommodating the rise in cash requirement in the average household far more difficult to accomplish, even if it then hits inflation in the breadbasket - so to speak.

Percy

@Simon Stephenson

What a load of bollocks, it's a straight choice. Keep rates low, continue the illusion of high asset prices or put rates up to where they should be and watch asset values crater. Rates will have to go up but by then we will have succeeded in shafting savers and then the endebted will have their go. Result everybody shagged...... oh hang on a moment.... we're all in this together.

Jo

This seems odd because the growth rate of the money supply is going down but inflation is going up?

I thought inflation was a monetary phenomenon how can their be a inverse relationship

Rhoda Klapp

Well, I think it was 2008 when I suggested here that the govt might be going for a little inflation. Unfortunately, or not if my memory is at fault, you can't search here for commenters, only bloggers.

It is hard to see how a rate rise will stop this inflation, except by a peripheral effect on the value of the pound. This is not an over-heating economy needing to be brought into line. The bank rate may be half a percent, but nobody can get a loan at anything like that. Things are already tight, and many are trying to pay down debt. When the price of essentials goes up, you have to buy fewer non-essentials. So retail and entertainment will likely suffer. Look for a shakeout on the high street. (That's one I've been predicting for so long I've lost any claim to prescience). A rate rise will kill it more quickly, while doing no good at all. If the government narrative is that the banks are not lending then a rate rise will do..what?

Do not forget that the real rate of inflation for poor people is far highter than the official rate.

Publius

"legally bound"

Unless someone can sue him, then this kind of "legally bound" means nothing. Very European that -- laws that are designed to be ignored at will.

Unless, of course, you are one of the small people that you describe. In that case, it is quite easy for the bureaucracy to dig up one among the cat's cradle of rules and accuse you of having broken it.

Publius

@Nick
"Anthony Hilton writes well on this today in the Standard. As he says - 5% inflation and 5% unemployment is better than 1% inflation and 9% unemployment."

If so, then presumably 10% inflation and 0% unemployment is better still. Or 100% inflation even, if that's what it takes? Or a 1000%?

normanc

@Frank Sutton, 11.08am

I read an analysis recently (it was about the US economy but fits the bill here) and the commentator touched on a theory that Friedman put forward.

Friedman said that printing money translates into steady inflation two years down the road and the only way to get rid of this inflation is to go into recession which will contract the money supply.

I'm sure there's a lot more to it than that but that was the gist of it.

Nick

Fraser, you have also overlooked the impact of the VAT rise in January 2010, which has also contributed to UK inflation being higher than our European peers. Plus the possibility that many retailers have raised prices AHEAD of the Jan 2011 VAT rise. The reason being so they can then say in January that they haven't raised prices.

Simon Stephenson

Percy : 11.42am

You appear to be arguing from the position that everything that has gone on in the past should be forgotten, and that the status quo should be considered to be a fair, equitable and balanced base that ought to be defended. I think you are probably wrong. I believe the crux of the world's financial problems is that there has been a period when savers were too-well treated at the expense of borrowers, and that this has resulted in financial asset and liability values becoming too high in comparison with real value. There's no equitable way forward from this without diluting the real value of these financial balances, whether this is done by voluntary agreement, inflation or default. Of course, voluntary agreement would be best.

Basically, the world's winners have imposed themselves too much on the losers, and there needs to be some reversal of this, preferably through negotiation. Otherwise it will be through fighting.

Chris lancashire

This is no time to panic and raise rates. This inflation is not caused by a wage-price spiral but by commodity prices and, as one poster has already pointed out, the depreciation of sterling some time ago.

Raising rates would stall the recovery, artificially raise sterling and strangle exports.

Calm down and don't panic.

michael

Interest rate hikes won't necessarily help, perversely it will fuel a flurry of remortgaging and drive bank lending which could fuel demand.

Man in a Shed

Clearly high inflation is policy, just not the policy the electorate is being told about.

This all seems clever on a number of levels, but it isn't "sound money"(TM Lady Thatcher) and its based on taking the people as fools. That's not going to play well.

BMC

2 things: One is that you must stop confusing CPI/RPI (Consumer/Retail Price Index) with inflation. The % change in CPI is the indicator, so saying "CPI above 4 percent" is nonsense.

Second - using deflation in Ireland as an example of British inflation not being imported is laughable. Ireland's prices are falling as their fixed exchange rate is forcing a devaluation through the price-level rather than currency.

The suggestion that this is an inflation "crisis" is borderline offensive, and the notion that the City suspects the government is looking to deflate the national debt away would come as a surprise to most people in finance...

denis cooper

Oh, so I'm not allowed to post any more comments ...

TrevorsDen

Some chap on Politics Today said UK underlying inflation (taking out collapsing pound and rise in VAT from 15 to 20%) was about 1.2% - not much different from the rest of the world.

Are we in a spending fuelled boom with too much money chasing too few goods?

We might expect QE to impoverish us as printing money makes the £ in my pocket worth less - but banks are not actually flushing the money back into the economy

AlanL

The VAT rise will not impact inflation (except very marginally downwards).

Inflation through 2010 (where 2010 prices are comapred with 2009 prices) included the VAT rise from 15% to 17.5% - a rise of about 2.17%. So we should expect a chunk of the current CPI/RPI figures to be from this (depending on how much of the standard basket is VATable at the standard rate)

If there were not a further VAT raise, then we would see this drop away, as 2011 prices are compared with 2010 ones.

There is, however, a further VAT rise to 20% (a rise of about 2.13%) - and so this will also be included in the inflation figures until the end of 2011.

So, the latest VAT rise will continue the process of keeping inflation high until the end of the year, but it will not push it higher still - you must look for other reasons for that.

PuppetMaster

"The last duty of a central banker is to tell the public the truth' - Alan Blinder, Vice Chairman of the Federal Reserve.
If you thought about it Fraser how could Merv tell you that he plans to get rid of our debts by inflation? What would everybody who held sterling do? They'd sell, that's what they'd do, then the pound would collapse. Merv would rather that this happened slowly rather than suddenly, as it would be easier to blame on somebody else.

Hugh

normanc 12:07
Yes, Friedman did speak on this subject as you say, and if I remember rightly backed up his theory with a persuasive long term graph which suggested 18-24 months lag to the reader.

Ron West

Some debt is on worthless things like imported trinkets and vanity items, other debt is on worthwhile things like a house to live in.

We need to rebalance things so that house debt is repaid rather than taking out even more trinket debt.

So, I think that Banks and Building Societies should be forced to impose a 1%pa (to start with) surcharge on the mortgage rate, whose entire proceeds would go into a separate linked sub-account to either provide a cushion against monthly repayment default in the case of registered unemployment, or a lump sum to pay the mortgage off earlier (early-repayment penalties made illegal in this case).

The main reason why they will have to be forced to do this is because Money=Debt and they rely on people's indebtedness for their entire business liquidity (see "Money As Debt" on YouTube for an explanation that even a child could understand).

Publius

The various apologists above seem to be finding excuses for why inflation should be ignored, or why certain types of inflation should be ignored.

If so, then should the remit of the Bank not then be altered? If it's this kind of inflation, then do something, but if it's that kind of inflation, then ignore it.

And if the Bank cannot influence the inflation rate, then what is the point of targeting it to do so? And if it can influence only certain types of inflation, then let that be made explicit.

As for Simon Stephenson's suggestion that the feckless borrowers somehow deserve my paltry savings, I'm afraid I do not agree.

Dan Grover

I wonder what Mervyn King does on a day-to-day basis at work. I'm not being snarky on facetiousness, I'm genuinely wondering.

jg

In 2011:
JANUARY - Fraser is appointed governow of the Bank Of England
FEBRUARY - interest rates are raised
AUGUST - inflation back to 2%
DECEMBER - inflation down to MINUS 2% as economy nosedives under high interest rates and government measures to tackle deficit. Forecast is bleak as high interest rates have strengthened pound, commodity prices are falling and immediate effects of VAT increase will no longer effect inflation figure. Fraser resigns.

yank

My position on this is simple. If Mervyn King has decided that Britain needs to inflate its way out of a debt crisis, he should say so - and stop pretending to be surprised every month when inflation is way, way off his supposed target. (And yes, stop pretending that all that money the Bank printed during ‘Quantitative Easing’ was not going to effect the value of the money in our pockets). But regardless of what King thinks, he and his team are legally bound to hit a 2.0 percent CPI target. He should either do so, or make way for someone who can.

.

Still blaming others, and not the sainted Dave, Spectator?

To repeat, this is clearly government policy. If you don't support the government policy, then say so. Stop with the mealy-mouthed obfuscations.

There are some near term actions government might take, to alleviate significant burden on the People, and you'd do well to take up their cause. One suggestion would be to begin shedding much of the recent burden of greenie regulations, taxes, fees and related foolishness.

That would require leadership, of course. Pity the Spectator rather disfavors such. The People would certainly welcome it.

Barry Bilge

AlanL,

That would make the successive VAT rises the reason for the high but stable rate of inflation.

We may be 'enjoying' managed inflation. What is in the pipeline for the next few years? Increased energy taxation and an annual 1 pence per litre above indexation rise in fuel duty to name two. Those could assist in keeping inflation above target and Merv could again wave away concerns by insisting a 4th and maybe 5th succesive year of above target inflation was caused by 'unexpected' pressures.

Central Bank interest rates bear little relation to how much banks charge these days. At the height of the boom it was LIBOR unsecured lending at about 3% driving things. The property market had become detached from reason and from BoE rates.

There is also another less defined angle with BoE rates - shouldn't it be for individual banks, savers and borrowers to manage the risk of their investments and borrowings? Perhaps the big banks became convinced that they could lend and lend at irresponsible rates until the BoE said Stop by raising the BoE rate, and the BoE never really said Stop because the BoE took a view that banks are responsible for managing their own risks.

Craig Ryan

@ Jo 11.43 am

"I thought inflation was a monetary phenomenon how can their be a inverse relationship"

It isn't, therefore there sometimes is.

AngloWelshDragon

@ Jay Mason

You're lucky you can pass the fuel rise on to your customers. My husband's customers in demolition and waste/scrap are slashing haulage rates to win work. Big firms are pricing work at less than cost and forcing small hauliers out of business (with the aim of being able to raise prices again once the competition turns up its toes). It is very, very sad.

TomTom

"his myth that quantitative easing is a significant cause for the higher inflation that we're experiencing"

Hilarious ! This is really self-delusion a l'outrance !

High-Powered Money which is what Debt-Monetization is (forget silly names like Quantitative Easing absurd as they are). Monetizing Debt by stuffing commercial banks full of liquidity expands the Monetary Base of the system.

That the Banks CHOOSE not to lend this high-powered money to households and SMEs is the choice of the Banks.

That the Banks DO fund Kraft to acquire Cadbury (Yes, RBS) or for Apax to try buy Smiths Industries units; or to lend to little boutiques in the West End of London to speculate on cocoa futures, wheat futures, oil futures, and a whole range of funds pitched at wealthy individuals is the CHOICE made by the banks.

The Liquidity is being used to engineer market squeezes and profit by this. It shows up in Bonuses. It is an easy business....borrow at 0.5% and go long on commodities but short credit card customers with 29.9% and change payment terms.

The only game in town is to make Banks hyper profitable by extracting liquidity from the Real Economy. The result will lead to Depression as high prices face collapsing demand.

Asda priced prawns at £4.98/kg from Thailand but then jacked up the price to £6.00 only to throw away caseloads of unsold product.

That is what will generate severe Market Corrections and is why Debt Monetization without Directed Lending Controls on Banks will collapse the global economy and bankrupt the banking system.

denis cooper

Nick -

Won't the inflationary effects of that earlier fall in sterling have worked through by now?

Looking at the trade weighted sterling index, the big drops were two to three years ago, and it's been relatively stable for the last couple of years.

Commentator

Publius, don't pay too much attention to Anthony Hilton. Much of what he writes is pretty second-rate. While inflation is a tax on savers and those on fixed incomes, it is above all, a tax on the poor who have no choice but to spend most of their disposable income on essentials. They cannot shield themselves to the same extent by cutting back on spending.

Ian Walker

Seems to me that if you are still a cash saver, you are frankly a bit of an idiot. This writing's been on the wall for at least a couple of years, during which there were plenty of bargains to be had in alternative assets.

Right now, I'd be buying property if I had the money.

Nick

"Won't the inflationary effects of that earlier fall in sterling have worked through by now?"

I suspect most retailers have been absorbing their increased import costs over the last two years as economy was too weak to raise prices. As the economy recovers (or they can no longer afford to subsidise their customers) prices have to rise.

oldtimer

Inflation is not a blip but a running sore. Commentators pontificate about the causes and calculate that if you strip out this factor (eg devaluation) and that factor (eg commodity price increases) then the "underlying rate" of inflation is nothing to worry about - by which I think they refer to UK wage inflation. Yet the fact remains that the consumer can not strip out or opt out of this or that factor. They must pay for them all.

Two things are clear.

First Government, both this one and the last one, has lost control of government spending and of the size of the deficit. There is no obvious sign, yet, that they have regained control of either. As for repaying any of the rapidly accumulating national debt - well, forget it. It is not even on the agenda.

Second, in the absence of any control to actually cut spending (all they try to do is to stop it rising so quickly) they rely on three weapons to deal with their problem. These are (1) higher taxes (2) inflation and (3) cheap money to pay for the extra government debt needed to pay the bills. Along the way, and obviously not content just with stuffing everyone with more taxes, they legislate extra costs for businesses and consumers (eg via so-called green energy charges and the paternity leave proposals announced yesterday). No doubt, as I write this, they are calculating how they can make a final assault on that last asset of so many - their property. It is obviously on their minds - it was a DimLib manifesto idea to tax houses - so how long before this insidious idea surfaces again? I give it about 12 months.

The political class has lost the plot and it has lost control. What a useless shower.

denis cooper

Barry Bilge -

But Brown had followed EU policy by taking responsibility for the prudential supervision of banks away from the Bank of England and passing it to the FSA, possibly the most disastrous decision of all out of his many disastrous decisions.

Ron West

I'm puzzled why the Government is supposed to be quietly stoking inflation to devalue the actual value of its debt, when most of its debt is effectively index-linked?

normanc

Oldtimer, an excellent post but not quite the last asset. They can always do what Bulgaria (if I recall correctly, was one of former eastern bloc) recently did and simply seize private pensions and let the government guarantee them.

For pension holders there I read it was either that or accept an 80% 'haircut' on the value of the pension but keep it in their own hands.

VictoriaVick

I think that you are right Frazer that a problem is building and that our Monetary Policy Committee keeps ignoring it. Its excuses about one -off changes and the move being temporary just get weaker and weaker.

I have been following a UK economist who feels this.
"2011 will be a year of many influences on us and the inflationary ones will be joined by deflationary ones too. We need to be ready for both and in my view currently policy is biased too much towards the deflationary influences and accordingly I feel that we need a re-balancing."
He argued that we needed an interest-rate rise back in late 2009 and events are bearing him out. For those interested he can be found at notayesmanseconomics blog.

Fatbloke on tour

Trevor

Your mentalness on inflation is beyond parody, it finally proves, as if proof was needed that you and the SpeccyLand viewpoint know nothing about economics.

Dave the Rave based his whole economic strategy on the position that public spending cuts would keep interest rates lower for longer.

Too bad that it was all total rubbish, reverse engineering to try and build economic cover for his naked dog boiling agenda.

You now start to put inflation into the equation with the attendant cure, that wait for it, the current low interest rates, the economic driver of Dave the Rave's growth "miracle" would have to be increased.

Consequently why is this on the agenda?
Given that Dave has also hinted that rates need to go up the question has to be why?

Are you and Dave so economically stupid that you think it is the right thing to do?

Did Dave always think it was the right thing to do but as always told political lies to try and make the dog boiling cuts palatable?

The whole inflation "crisis" reeks of kitchen table economics and the need to shovel yet more money to those that are net savers, not withstanding the fact that the net savings came about from working the house price game, high wages level in the past for the middle class that was not financed by high levels of productivity and access to a good pension settlement.

Savers in the UK are usually older and more wealthy than the general population, however they vote and they usually vote Tory, so no surprise there from the "we are all in it together" PM.

Inflation is an issue but it is a secondary issue at the moment and interest rates need to be kept low, any increase will hurt the weak recovery that we do have.

Higher interest rates - Raising the BoE rate will:

1) Lower demand through higher mortgage rates.
2) Not help savers but increase bank profits.
The increase will not be passed on in full.
3) Decrease the UK's international competitiveness through a higher pound.
4) Kill the now weak recovery stone dead.
5) Prove that Dave is a complete walloper.

Maybe Sniffy got a shock at Klosters and decided to reduce the cost of his next trip.

Consequently if the ConDem nation wants to lose the next election, and things are a bit ropey at the moment then go ahead.

On thing is for sure Milli-E knows the way the world will work if this monetary nihilism becomes a reality.

oldtimer

@ normanc

It is very naughty of you to give them the idea. Of course Brown made a start with his pensions tax and later the tax on dividend income in ISAs. No doubt private savings are all that is left for the political class to appropriate. No doubt this will be dressed up with talk of "fairness", "social justice" and "we are all in this together" - except we are not. Some have saved. Others have not.

Rhoda Klapp

Would any of the kneejerk rate risers like to explain to the oxfordshire housewife by what mechanism a rise will contain inflation when neither the householder nor industry is borrowing? Yes, the government is borrowing, but if they are the reason for any (completely invisible to me) over-exuberance in the economy then they only need to stop, raising the rate won't change that one way or the other. It will damp any recovery and knock over some businesses, and I am not sure that is what we want, right now.

Fatbloke on tour

DC @ 3.21

You are having a laugh.
The BoE was hopeless over a period of 30 years at supervising banks.

To be fair it was very good at building lifeboats, so good that it was rumoured EG had a degree in Naval Architecture, but bank supervision, forget it.

Please try and remember:

Secondary Banking Crisis.
Third world debt problem - technically insolvent in some cases but allowed to drip feed the bad news over time in manageable chunks.
Midlands venture into the wild west - again a basket case / zombie bank until it had sorted the worst of it out and then allowed to die (be taken over).
BCCI - Worms, can of, jumbo sized.

If you are happy with that little list then you have different standards to me.

Consequently something had to give, a new arrangement was needed. However when it failed it failed in a similar manner to ban supervision in the US and parts of the EU.

Even then you have to realise how stupid our bankers were:

RBS = Balance sheet you could spit through.
RBS = Management ego trip who could not resist beating the muppets he was up against down south.
RBS = Bulked up its profits by getting involved in CDS's.
HBOS = Lived on short term foreign money.
Barclays = Grew on the back of the tax avoidance boiler house that was BarCap.
HSBC = Sensible but couldn't resist the "profits" at the Provy cheque end of the US house market.
LBG = Thin on its balance sheet and its funding.
NR = Lived on 6 month money.

MICHELLE

Fraser, you have had this on your radar long before others - albeit you spoke sotto voce - so credit to you for that. The public here, at the Telegraph and elsewhere have spotted Merv's trick just as long ago, too and have rightly screamed at any journalists helping Uncle Merv in his disingenuousness. They were right to scream.

You are at your best when it comes to economic commentary - it's where you dare to challenge the coalition most (even if it is only to help save them).

If only you would be as searing on social policy and foreign policy, I think the readers' mutiny might abate!

Up with UKIP!

Chris Cook

Some misconceptions here, I think.

When dollar interest rates are at 0% and the Fed is printing lots of dollars out of thin air to buy financial assets, then investors holding literally tens of billions of dollars have got out of dollars and bought ANYTHING but dollars, income-bearing or not.

Of course, as we see, this 'inflation hedging' investment includes energy and food commodities as well as gold and silver, whose inflated prices do not exactly inconvenience the average shopper.

So depite the myths put about by dumb politicians and dumber media, the culprits are not greedy speculators in search of transaction profits, or greedier banks who certainly would not tie up their scarce capital supporting commodity prices.

Producers - particularly oil producers - are essentially able to maintain prices at the high level where 'demand destruction' sets in. They are essentially borrowing dollars interest-free form fearful and risk-averse investors to do so.

All that raising interest rates would achieve is to transfer purchasing power from the productive working segment of the population to the unproductive investor segment.

Which would make a bad situation worse.

Bexleyite

Quote from the BoE website: "The Bank sets interest rates to keep inflation low to preserve the value of your money"

And another: "One of the Bank of England's two core purposes is monetary stability. Monetary stability means stable prices - low inflation - and confidence in the currency. Stable prices are defined by the Government's inflation target, which the Bank seeks to meet through the decisions taken by the Monetary Policy Committee."

If the BoE is not meeting that core purpose why is Mervyn King still in a job?

If Simon Stephenson is looking for higher inflation to lower the final cost of the plasma tv he put on his credit card I see no reason why it should be at the expense of the savings I've put aside to pay for future food, power and care bills.

If, on the other hand, he's put his food on his credit cards then he should shop cheaper or go for a better job.

denis cooper

"The BoE was hopeless over a period of 30 years at supervising banks."

We went for 150 years, not just 30 years, without a run on a British bank; and then within less than 10 years of the FSA taking over the prudential supervision of banks we had Northern Rock.

denis cooper

George Osborne supports the Bank on its fight against inflation:

http://www.bbc.co.uk/news/business-12216726

What do you think about that, Fraser?

Edward

"Isn't it at least arguable that savers have been pampered so much over the last 20+ years that an equitable re-balancing of the scales between borrower and saver is well overdue?"

Yes, how unfair that people who save every month have done better than people who borrow to buy a flatscreen TV! How very unfair! We want justice!

Fatbloke on tour

DC @ 5.27

The Credit Crunch is the biggest financial event in the banking industry for 135 years. The FSA had nothing to do with the madness that took over UK bankers.

Are you going to try and blame the problems in the US and EU banks on the FSA?

Consequently stop trying to force the causation of events to support your own political agenda.

Percy

@denis cooper

Rememeber at all times 'We're all in this together' copyright G Osbourne

doppelganger

"‘Quantitative Easing’ was not going to effect the value of the money" or "‘Quantitative Easing’ was not going to affect the value of the money"?

daniel maris

...and still the government won't stop 40% pay rises for the bankers.

I'd like to see a Lower Middle Class RPI (or should that be RIP) - we are being clobbered, thrown to the ground and then given a good kicking by this government. Since people are being proletarianised by this government - they will do the obvious thing and start voting Labour in droves.

A pensioner

I'm told that savers need a rate of 6% to keep abreast of inflation. Who can manage that? It isn't always convenient to buy ingots.

Frank Sutton

savers have been pampered so much over the last 20+ years... , claims Simon Stephenson.

Not quite sure why holding on to a bit of the heard-earned amounts to being pampered, and anyway many savings are worth little more than the cash that went into them.

TomTom

"So depite the myths put about by dumb politicians and dumber media, the culprits are not greedy speculators in search of transaction profits, or greedier banks who certainly would not tie up their scarce capital supporting commodity prices."

Must rush over and tell Goldman and JP Morgan they will probbably close down their commodity trading operations after Chris Cook advises them !!!

There is no scarcity of capital for banks to glean easy speculative profits. There is no wish to go for risky capital outlays on property.

Property was the antidote to Dot.com excesses, now Commodities are the way to improve ROE which is desperately urgent for these insolvent institutions which have shafted shareholders.

Rigging markets is like shooting fish in a barrel and without Lehman and Bear and wacko HBOS there is much easier money to be made without the kamikaze traders

Simon Stephenson

I don't wish it to appear that I am totally blasé about inflation. I'm not. But the reality is that no government of any complexion would make a fetish of repaying debt at par value. Every government would be looking for any way to reduce the real cost of debt repayment. Certainly there is a need for some noise made about keeping inflation under control, and every so often policy has to be changed to create the impression that inflation is being taken seriously, but I think it can be taken as automatic that any government, anywhere will seek to inflate away as much debt as it can possibly get away with.

If the Conservatives were to become as puritanical about inflation as many of the contributors on here, they wouldn't have a snowball's chance in hell of winning the next election, no matter how morally correct the control of inflation may be.

Ben

The public knew we were going to get inflation even before the Bank of England knew. That is why we were buying Index Linked National Savings Certificates months before they closed it!

Baron

past evidence suggests that an increase in money supply seeps through to the real economy within 18-24 month. The £200bn of QE money may not run to the same schedule, the banks that sit on it aren’t sure what will happen when the rollover of loans they have on their books comes due. If the money isn’t needed for the refinancing, they will let it out, lending it to the same businesses and eager first time house buyers who are now screaming they cannot get it. The amount is more than pocket money, it equals to some two years and six months spending on the NHS. What will happen when the money begins to pour out is everyone’s guess. I reckon inflation, the RPI, will hit a double digit number. The two boys running the country will tell us they hate it, privately they’ll be pleased, it’s a way of reducing the huge deficit without the need to put up taxes, cut public spending and stuff. It may seem cruel, but we, the unwashed, are the only wealth creators in the real economy, and as such we have to bear the consequences of the past ‘no boom no bust’ insanity. Than Gordon and remember that life ain’t fair.

Rhoda, the monetarists argue that money is a commodity as any other. You hike its price, i.e. put interest rates up, the demand for it falls, hence inflation eases off.

Chris Cook

@ TomTom

Goldman Sachs and Morgan Stanley certainly make money out of volatile markets in the same way that the casino makes money from the zeroes on the roulette wheel.

But they most certainly are not responsible - although they may well facilitate - maintainenance of commodity prices at high levels. As I said, that occurs because producers are able to sell or lease commodities to risk-averse financial buyers.

I've spent 25 years in market development and regulation, for six of them a director of a global energy exchange.

What is the basis of your opinion on markets?

TomTom

"What is the basis of your opinion on markets?"

My friends and Classmates are running the funds making the money and hiring people like you to tell the suckers they don't need to worry. Ohm and they are non-doms too so they won't need to worry

Rhoda Klapp

Baron, thanks for the only attempt at an answer. I understand the cooncept, my problem is, right now, in this set of circumstances, what atual effect will raising rates have on the behaviour of actors. Raisng rates in my case will increase my mortgage. I am already spending on essentials, I will have to cut spending on non-essentials. Luxuries and entertainment will not get bought. Perhaps thsoe things will respond to my actions and come down in price. But that does not balance the price of essentials. Shops fail, nobody gains. I understnad the rate rise when things are over-exuberantm, when people borrow because they have conficence, but I don't see the same mechanisms when money is already tight. Another factor, and this is a hunch on my part, is that inflation = x ergo rate rise = y is a pretty naive approach. Economics is not a science, formulae never work. What works once will not work again, and simple relationships do not exist.

So I ask again, if the rate goes up today, what actual mechanism (not theoretical relationship) will stop price inflation in items which are not optional but subject to supply and demand on a global scale, or indeed items which comprise mostly of tax imposed by the self-same government which purports to be worried about inflation?

Proponents of this BoE law might like to ask how the bank is supposed to fix inflation under the act in circumstances where rate changes are an invalid or brutal weapon.

And savers? Nobody is going to help you this time. If you have the money, they are going to get it off you. Because you have it. You had the banks rescued, that's your lot. No, it's not fair.

stephen maybery

Throughout history, the dodge of choice of governments in a bind, has been to debase the coinage, the result has always been inflation. Call it what you will, but the moment the authorities came up with the rib tickling term "Quantative Easing," then the outcome was guaranteed, and why anyone should find this surprising is beyond me.

Hayes

Chris Lancashire is right.

You could raise interest rates.

But what affect would that have on food prices, which have probably gone up the most?

Food scarcity and bad weather are pushing these prices up (although the supermarkets seem to be doing very well, thank you very much?)

Isn't it funny how all these big companies (oil producers, energy, supermarkets) exploit fear about future production to push up prices and make massively increased profits (thereby proving that they weren't really pushing up prices because of increased costs to them, they were simply exploiting fear and being greedy).

The days of cheap food are over. Why? population increase, water shortages, increased biofuel production and climate change.

How would higher rates help?

Andrew Tennant

High inflation, and decreasing the value of our national debt, held in pounds, is likely the only way we will dig ourselves out of the quagmire Labour left us in; and, in the long term, with a resultant devaluation of our currency, will leave the UK more competitive and the government with more spending flexibility as opposed to rigid austerity.

However, as a saver and not a borrower, who expects to see my prospective house deposit devalued, while house prices increase and the already wealthy stop worrying about negative equity, I'm not really happy.

Johnathan Pearce

Simon Stephenson says he is not blase about inflation, but how on earth to interpret this paragraph, higher up on this thread:

"I believe the crux of the world's financial problems is that there has been a period when savers were too-well treated at the expense of borrowers, and that this has resulted in financial asset and liability values becoming too high in comparison with real value."

It is hard to know how to summon breath at such a point of view. In the US, for instance, the country had negative real interest rates in the early Noughties (inflation was higher than actual Fed rates), in which case, people were actually paid to borrow money. It is has been similar in several other Western economies, such as Ireland. Savings rates, as a percentage of GDP, have been at low levels during the 1990s and Noughties in the UK, US and other countries. Instead of financing investment via genuine, real savings, much investment - or speculation - has been achieved by central bank fiat money, bending the economy out of shape, encouraging massive capital imbalances and leading to a dangerous asset price bubble. I don't think this is a particularly controversial PoV.

To suggest that the current situation is "payback" for the supposed encouragement of savers in the past is downright bizarre. One central feature of government policy must be to remove disincentives to save so that in future, investment is based on real savings, not crap printed by the Fed or BoE.

And Fraser is damn right to flag up this issue, though lord knows how or when the BoE will act. For what it is worth, Mervyn King is probably fully aware of the problem the UK faces.

Baron

Rhoda, hard to fault your train of thought, but take it from me, it has always worked, there aren’t any economists whether they follow the Keynesian or the monetarist school, who would dispute it; the higher cost of money reduces inflationary pressures. It takes time for the impact to be felt, it’s crude and stuff, but it works not on an individual basis, only in aggregate for the whole of the consumer demand because the vast majority of the unwashed, the businesses have to cut back across the board.

I happen to be an economist of the monetarist phylum hence the argument that the massive injection of money from the QE (more than £3,000 per each man, woman and child) cannot but inflate prices by far more than either the past appreciation of sterling (this has stopped anyway, if anything got reversed vis-à-vis the dollar) or the current hikes in world commodity prices. For Governments high inflation is a Godsend, they don’t have to do anything to make us angry, like increase an income tax, VAT for the Treasury receipts to get boosted, the deficit reduced.

What amazes is that we seem to be talking only about savings in terms of fixed rate deposits, nobody has mentioned other options such as equity investment, take a look at BP shares for example, the company got hit because of the Gulf spill, it lost its CEO, is paying some $20bn in compensation. On the positive side, it has restructured, signed a deal with a Russian state owned giant to explore potentially the last massive deposits of oil & gas, it cannot but benefit from a rise in oil prices, it deals in a commodity that is finite, if inflation rises the share price will acknowledge it. Most importantly, the company used to and very likely will again pay a dividend that beats any rates offered by any of the high street banks. It may be worth your while talking to a broker, divesting some of your savings.