America has deflation: Britain doesn’t. Really. Not at all. In fact, rude as it may be to point it out, prices are soaring here. Britain has the highest inflation in any European country. Sure, the RPI index is in negative territory – as you’d expect given the collapse in interest rates. But the average British shopper is still being fleeced at the tills, and the consumer price index (CPI) was 2.9 percent in March – something like the third worst reading (above the MPC target of 2.0 percent) since the Bank of England’s so-called independence. It was only a couple of months ago that the Bank was forecasting 2.69 percent inflation for Q1 2009. It has turned out to be 3.0 percent. Inflation is overshooting expectations.
There is much political mischief to be caused in talking up the threat of deflation. This is the excuse Gordon Brown needs for printing money – a process which has huge inflationary risks. Having the Bank of England print money and use it to buy UK government’s debt could just about be justified when we were worried that the UK may face Japanese-style (or US-style) deflation. One cannot honestly make that argument now, yet the QE policy continues. This now looks not just ill-advised but downright dangerous. If it hadn’t been for the VAT cut, CPI inflation would be closer to 4 percent. Costs are rising in Britain, wages are being frozen and people are hurting. Inflation is the risk we face in Britain, especially if the Bank of England keeps pressing ahead with its £90bn money-printing scheme. CoffeeHousers about to remortgage should take a low-rate five-year fix while they are still on the table.
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