David Blackburn

Short term or long term inflation?

Short term or long term inflation?
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The news that the CPI rose to 3.5 percent doesn’t seem to have affected the markets, but the cost of living is soaring. Mervyn King has written to Alistair Darling predicting that inflation will fall back to the benchmark 2 percent over the course of the year, and that the current explosion is a result of short term factors such as the restored VAT rate, a 70 percent rise in oil prices and the depreciation of sterling.

David Blanchflower is right: inflation may eat a little of Brown’s debt mountain and it will help those who now hold negative equities on houses. But it does precious little else that is positive, especially as wages are unlikely to follow suit in this climate. As Mark Bathgate has consistently noted, Britain’s inflation rate is already ahead of the rest of the G7 (see graph above). Ally that fact to languishing sterling and Britain’s dependence on imports and the nation faces a dramatic decline in living standards. Citi’s Michael Saunders forecasts a ‘larger and longer CPI overshoot that the consensus and MPC expect, mainly reflecting lagged effects of the recent surge in import prices.’ It is a high price to pay and a long sentence to serve for Brown’s fiscal free for all.