Inflation is one of the most important topics around right how so I thought I’d
respond to CoffeeHousers’ comments in a post rather than the original thread.
Nick and Gareth Sutcliffe say that inflation is due to global forces (and they’re right insofar as metals, food, etc are all going up). But if the money supply is managed properly, this needn’t push consumer prices too high – most other countries have stable inflation, as the first chart in my post shows: Britain is in Greek territory. My point: the British level of inflation is exceptional.
Greenslime suggests price controls – a very bad idea. Even Marx saw this. The prices of things transmit valuable information about supply and demand: without it, economies are doomed. Engels makes this point in the intro to The Poverty of Philosophy. Without market prices, he said, we’ll have no idea of what’s needed – or what’s being overproduced. But when everything is going up, as Marx didn’t say, it is always and everywhere a monetary phenomenon.
Normanc ventures the idea that this inflation is deliberate. Plenty of countries have adopted this strategy: inflation has long been a way for politicians to finance their misbehaviour. But, in theory, Britain is committed to CPI at 2.0 percent. King might well think that this target is less important than the stability which he believes will come from inflating away debt – but, if so, he should tell us and drop the pretence of inflation targeting. Every month, inflation now “surprises” on the upside, and the market is beginning to smell a large, whiskered rat. This suspicion is being priced into gilt yields, and a recent Citi/YouGov poll showed that expectations of inflation are rocketing. The public is losing confidence in King’s ability to keep prices stable, and this in itself fuels inflation. King needs to make a speech attacking inflation. His silence makes people like Normanc suspect he is nurturing another agenda.
Adrian Sells says that raising rates will cause pain. A little – but if we allow Britain to incubate a proper inflation crisis, rates will have to rise by a lot. And that’s far more painful. Ignoring a problem doesn’t mean it goes away – that was the moral from the last crash.
Rhoda Klapp says King isn’t responsible for international commodity pricing. Neither is his Irish counterpart – and prices are falling in Ireland. King was responsible for QE, printing money, which has a well-understood and (as Andrew Alexander said in the Daily Mail on Monday) delayed impact on inflation. Again, CPI of 3.3 percent is the highest in Western Europe apart from Greece. Why aren’t consumer prices rising in Japan, Eurozone and America if they are in Britain? Also if prices are purely a global phenomenon, why bother giving the BoE an inflation target? Nomanc makes this point too.
Tiberius says that I might be wrong. He’s right, of course: I venture nothing more than my opinion. False certainty has been a curse of recent economic management, and nothing more dangerous than the false belief that inflation targeting meant economic stability (see Maurice Saatchi’s CPS pamphlet for details). Tiberius suggests I speak with the bitterness of a man on a 5 percent fix. For the record, I’m on a variable mortgage – I have no personal incentive for rates to rise now. Except that I’d rather not have another economic crisis to report on.
Denis Cooper says that King is legally mandated to pursue a 2.0 percent CPI target, so I should not blame him for obeying orders. But King is missing this target – last time I checked CPI was 3.3 percent and rising.
Percy regards King as a “useless plank” – I disagree. I think he’s a wise man, and it’s the MPC – not just King – which decides the rate. But, as Governor, he is centrally responsible for the stability of money supply. Over the last ten years, it has been anything but stable: the years of loose money fuelled a credit bubble, which inevitably burst, and now another avalanche of cheap debt is flooding the economy and letting inflation rip. Bank of England independence was regarded as a great triumph during the boom years. I doubt history will be as kind – the looseness of UK monetary policy from 2001 will probably emerge as the primary reason for the crash. Why fight the benign deflation? Why ignore the asset price boom? But, most of all, why have base rates at an absurdly low 0.5 percent at a time when the economy is growing at a steady 2 percent, and rampant inflation is back? This is King’s party. It’s getting out of hand. It’s time he took away the punch bowl.
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