The growing need for a policy response to the ‘new inflation’

commentator

Why does it make any difference that inflation is being affected by external factors? That was true in the seventies (the oil price). No-one then said that it was a great idea to let inflation get out of control.

Nickle

Yep.

And the plan is to put another 600 pounds a year on people's energy bills by increasing them at 1 pound a week for the next 12 years, to worship the god of global warming.

In reality, its all about the rich getting the government to guarantee their profits.

What better than to put in some renewable energy and get the government to tax other's for you?

Wait for all those photovoltaic cells pumping out energy at night, because you wire up your neighbours normal supply to run arc lights, or more likely, just feed in power from his supply into your 'green energy supply'

Rex Burr

The Government could start by rejecting the biofuel nonsense both at home and internationally.
They could follow that up by scrapping wind and PV generation subsidies.
Raising capital to finance the construction of real energy generation infrastructure should be by increases in 'ability to pay' taxation.

Rhoda Klapp

So, when you take out the VAT and the results of energy policy, how much of this is not down to the government itself, not the poor old BoE? When the VAT is twelve months in and thus falls off the end of the figures, will anybody be trumpeting the magnificent drop in inflation? Knee-jerk responses to headline figures are no good here, the analysis by category in the post has much to recommend it.

James Shelley

If it's global, why does UK have worst inflation in Europe? And did you really need all those words to tell us "inflation is regressive?" And the poor spend a greater share of their income on food, you say. Wow. Very pleased the Resolution Foundation unearthed this stunning piece of news, we'd never have guessed otherwise

mal

Political implications? What about the practical implications. Real inflation has been much higher than government statistics for years. We are fast approaching the time when people will simply not be able to afford to travel to work, or eat a decent meal. This is what you expect governments to protect you from. And they are not. Not Brown, Not Cameron.

Hugo Chav

The biggest inflation problem is Property, both residential and commercial. We have ZIRP and had QE to stop them falling to a more natural rate.

Only when they have rebased will the consumer and businessman be able to start a new allowing real growth to transpire.

At the moment we have a zombie economy which is suffering from Stagausflation (staganation + austerity + inflation), this could tip into Depflation (depression + inflation) if the BoE lose control of the Gilt market.

There is no easy way out, the most sensible strategy is a hyper-dynamic supply-side revolution.

With a polis addicted to tax & spend you can kiss radical solutions goodbye. It will just be a slow and steady decline in living standards....in fact it is here and now.

No more boom & bust, what an epitaph for our political elite!!

The wonks will wonk....

daniel maris

People are thoroughly sick and tired of rich people awarding themselves ever larger salaries while most people in the public sector and many in the private sector are on wage freezes in the context of 5% inflation.

The headline rate for inflation is also not credible for most people on low to middle incomes - the real inflation rate for them in terms of energy, rents, transport, government services and so on is much higher than 5% - probably nearer 10%.

There is no way huge bonuses for the executives of failing banks can be justified.

If this carries on for much longer the credibility of the mixed economy itself will be called into question.

Lola

Oh for God's Sake! Why is this such a surprise? Taking the Austrian definition of 'inflation' that it is a function of money not prices and that price rises are a result of inflation, not its cause, then all this 'inflation', that is price rises, were entirely predictable from about 1999/2000 onwards as Brown deliberately lost control of the money supply.

The answwer would appear to be to let the antidote, deflation, run its course. That of course would make politicians very unhappy as it would prevent them from inflating away the value of the obligations to us they have racked up in our name. The whole merry go round of the State, the banks and money is bizarre.

Charles

James Shelley

Because most international commodities - including food and fuel - are priced in USD. We devalued our currently by 25% - the Euro is current incredibly strong vs. the dollar.

UK prices have thus imported inflation.

TrevorsDen

The government putting up interest rates will not bring commodity prices down - except that it will make us even more austere. It would through restricting demand bring down prices.

But since we have just been through a massive recession I would suggest that creating another one is hardly good economics or politics.

John Montague

Which way does Osborne want to see the sterling exchange rates with the euro and the dollar move then? We seem to have improved the trade balance in goods with the US over the last 3 months, compared to previous years.

I'm pondering whether now is a good time to put some £ into $ for US stocks. What's the betting?

@ Charles

Did we devalue ... or was it done to us by the markets?

Sir Everard Digby

I am puzzled by this article.

Inflation is defined as ' sustained increase in the aggregate or general price level in an economy'

The factors affecting that may be beyond the Chancellor's control -the car crash he inherited from Labour for one.

Government's have a poor record when they intervene to influence commodity markets -witness their inability to do anything about oil price inflation in the 70s.

As the UK no longer controls any commodity production worth talking about,this circle cannot be squared.

However the Government don't want to do anything about it.As Friedman says 'Inflation is taxation without legislation'

TomTom

When Heath got UK inflation up into 10%-20% range with his lax monetary policy he talked of a "Non-Oil Deficit" which seemed to be a fine way to improve the B of P....especially if you didn't import oil.

Now we are back there...importing food, oil, capital, consumer goods....and making Magic Money to pay for it all.

The fact is Inflation is a rate of price INCREASE but the Price LEVEL and Cost BASE has increased even when inflation drops and it is the Cost Base which makes us uncompetitive so it is DEflation that is needed to correct Inflation to bring costs back in line with traded prices ie. Slump and Benefit Cuts to re-align British product prices with internationally-traded goods

disenfranchised

rates will go up when the gilt market finally gets it's reality check and the pound has to be floorboarded. but no matter where inflation goes, the country's rewritten rules of economics dictate that it can never be a driver of rates.
all those redundant books on economics will come in very handy when the power stations are out of fuel.....

Ian Walker

Sigh. Income =/= Wealth

That's a 'progressive' socialist lie that keeps the social order precisely where they like it, with the useful idiots dependent on the massive state.

John Emsley

One thing the government could do is let the £ rise. The UK is a net importer and a weak £ simply means imports cost more-hence inflation. The argument that a weak £ stimulates exports I find very weak. Companies who are successful exporters have the necessary commercial infrastructure in place and an established demand. For a company to suddenly start exprting there is a lot more to do than be cheap.
But then none of the current lot of politicians has ever run anything (sorry Vince), so they wouldn't know would they?

Simon Stephenson.

Ian Walker : 8.40am

I've tried in vain to discover what =/= means, Can you enlighten me?

Chris lancashire

At last! Recognition that present day inflation is not a result of the old wage-price spiral. Nevertheless your own editor would still treat today's malaise with yesterday's tool of raising interest rates.
Not the solution.
Energy and food prices will only go one way in the long term and we need long term policies to address this, whether it's renewables, increased farming tax breaks or many others. What definitely isn't the solution is raising interest rates.

Perry

We may rest assured that the ever-attentive and ‘listening’ Leader of the Conservative and Bliarist Party will pay due attention to all these blog comments and act in the best interest of the country and people. No hand-wringing sycophant will be allowed to sway the judgement of the great man.

Ian Walker

Simon: See en.wikipedia.org/wiki/Inequation

Unfortunately, trying to enter the correct character breaks the CoffeeHouse text

alexsandr

well diesel prices seem to be coming down in the midlands.
Maybe someone needs to tell the wonks at the BofE that lower fuel prices may well reduce inflation next time.

Doppelganger

I seem to recall during the 1970s oil shock Japan and West German by pursuing head on anti-inflationary policies were far more successful in keeping inflation down than the UK which adopted a less aggressive stance.

Rhoda Klapp

Doppelganger reminds me of something from the 70s which I am unable to remember the name of, or find on Google. During the Heath regime, all public sector employees (and yes, I was one) had an index-linked pay scheme whereby every month, if inflation passed a given threshold, pat was increased by a fixed sum. Like a wage-price spiral built in. That is not an anti-inflationary measure by any means. What a prat that guy was, what a disaster his administration, and the Labour ones of that era.

Anyway, can anyone remember what the scheme was called?

Simon Stephenson.

Ian Walker : 11.45am

Thanks.

Cynic

Lola has it spot on. It's in the government's interest to inflate away the debt, tough on savers and those on fixed incomes as it may be. Food and fuel are imported and the pound has lost approx 25% of its value so of course essentials are going to cost more. An interest rate rise and more emphasis on energy/food self-sufficiency are long overdue.

Al

http://www.exeter.ac.uk/shapingthefuture/2011/title_138617_en.html