Inflation

So the Bank of England has pulled the lever on a second round of Quantitative Easing. Apparently sluggish economic growth, plus more ominous signs from the eurozone, have persuaded the central bank it can’t wait any longer to print more money. But given the evidence from QE1 – only a small boost to GDP accompanied by extra inflation – it’s a big gamble. Mervyn King & the rest of the Monetary Policy Committee clearly believe that more money in the system is what’s needed to kick-start growth. But even they admit that QE1 didn’t live up to expectations, so why should QE2? In the meantime, quantitative easing as an instrument

I make no apologies for returning to government spending on health. The Tory promise in the election to ring-fence health spending and increase it in real terms every year even during a period of public spending cuts was distinctive and much-touted during the 2010 election campaign. A quick recap: during my extended interview with Health Secretary Andrew Lansley which went out live on the BBC News Channel on Sunday evening, I suggested that higher inflation than anticipated when the health spending promise was given would make it more difficult to meet the Tory promise of real annual rises. Indeed I put to him a projection for real health spending which

Before the election, the Conservatives promised they’d “protect” the NHS, which they defined as increasing its real-terms budget year-on-year. This is a rather dangerous promise because it makes ministers hostage to inflation. Now that inflation has surged, expectations have been revised upwards, and it looks like the NHS budget will suffer a real-terms cut. In its monthly update of City consensus forecasts, the Treasury has released new figures for inflation over the next five years.Apply the latest inflation figures to health spending in the last budget and it implies a £1bn shortfall . The graph below shows the change over five years: Back in March, the IFS said that the

Today’s inflation figures remind us of the trouble the Bank of England will have if – as most analysts suspect – it embarks on another phase of Quantitative Easing. CPI inflation was 4.5 per cent in the year to August, and RPI at 5.2 per cent, both up a touch from July.  CPI inflation has now overshot the Bank of England’s 2 per cent target for 60 of the past 75 months. It has been at more than 3 per cent since the start of 2010. As a result of last month’s figure, Governor Mervyn King wrote his now-standard letter to George Osborne to “explain” why inflation is above the

It’s time to warm up the printing presses. When growth evaporates and governments feel politically unable to cut spending or raise taxes, there’s only one tool left: printing more money. We can expect more of it soon. As James says today, Osborne believes he has created the conditions where the Bank of England can do some more Quantitative Easing and it could start as early as next month; an unusual move, given how high inflation is. But the Bank is (as ever) forecasting a return to the 2 per cent target soon – and may now claim that economic weakness makes an undershoot likely. And so (the logic will run)

“Inflation destroys nations and societies as surely as invading nations do. Inflation is the parent of unemployment. It is the unseen robber of those who have saved. No policy which puts at risk the defeat of inflation – however great the short-term attraction – can be justified”. That was Margaret Thatcher, speaking in 1980 when inflation was much higher but British politicians actually cared about it. You won’t even hear the Governor of the Bank of England denounce today’s figures: CPI at 4.4 per cent and the traditional measure of inflation, RPI, at 5.0 per cent. It is seen as just another statistic. The government has also chosen to announce

A bet-hedging sort of report into the UK’s economy from the IMF today, which largely supports George Osborne’s deficit reduction plan, but will also give some encouragement to his detractors. By way of a summary, here are the parts that might satisfy Osborne himself, as well as Vince Cable, Ed Balls and Mervyn King: The passage that the Chancellor will flash around Westminster comes on the very second page of the IMF document. “Strong fiscal consolidation is under way,” it reads, “and remains essential to achieve a more sustainable budgetary position, thus reducing fiscal risks.” And the endorsements for the Chancellor’s deficit reduction plan continue inside, not least in the

By now, George Osborne will have seen tomorrow’s GDP figures and I suspect will be having a mid-afternoon whisky. Ed Balls will be warming up for his demands for a Plan B. “Austerity isn’t working,” he’ll say — and will doubtless tour TV studios with his usual bunch of dodgy assumptions which he hopes broadcasters won’t challenge. Here, as a counterweight, are a few facts and figures about austerity, how harsh it is, etc. — and the case for a Plan A+. 1. Where are the “deep, harsh” cuts? The Q2 GDP data will complete the economic picture for the first year of George Osborne’s time in the Treasury. But

Away from the clamour in the chamber over the bowdlerisation of the NHS reforms, a group of MPs led by Robert Halfon convened in Westminster Hall earlier this afternoon to debate how rising fuel costs might be abated. Treasury minister Justine Greening attended for the government. With the average price of unleaded at 136.9p/litre and diesel at 141.5p/litre last month, fuel costs are now a major concern for ordinary families. According to the campaign group Fair Fuel UK, who are working with the MPs, the average motorist who has to drive to work spent £33/week on petrol last year, taken from median pre-tax earnings of £499/week in 2010. With inflation

New inflation stats are out tomorrow and they’re expected to show further rises in CPI and RPI.  Aside from their brief peak in 2008, headline rates of inflation are now at their highest levels for 19 years.  That’s prompting more discussion about the way rising prices are playing out for Britain’s households, from a nice graphic in today’s Times (£) to a new report due out tomorrow from the IFS.  But one implication of today’s higher inflation environment is receiving less attention – the impact of rising prices on work incentives. Inflation and work incentives aren’t often mentioned in the same breath.  But when work-related costs rise more quickly than

So what does George Osborne mean by “flexibility“? Do we hear the quiet sound of a gear change, prior to a u-turn? No, I’m told, it’s Plan A all the way. And here are the details. The government’s five-year departmental budgets (the so-called DEL limits) are set in stone. They won’t change (in cash terms) until April 15, after which no figures have been set. If inflation continues to be high, then this will exacerbate the real effect of the cuts (Osborne has already seen trouble caused by with this as inflation has turned the tiny NHS budget increase into a tiny NHS budget decrease). The OBR reckons it may

He left with a warning. “I think that there is a big risk emerging to the credibility of the Bank,” said Andrew Sentance last night, on his final day as a member of the Monetary Policy Committee. And he continued, “If inflation does not come down in the way that the Bank is suggesting — and I think there is a big risk that is the case — then that is going to have a big knock on effect on the credibility of the bank’s commitment to its inflation target.” Sentance’s views are unsurprising. He has, after all, been pushing for an interest rate hike for some time, and for

There’s been much debate on these pages about the political implications of higher inflation. Ironically, this morning’s news of record food prices could relieve the pressure on the Bank of England Governor. His argument for caution when it comes to a rate rise is based on the claim that UK inflation is now being driven by events beyond the MPC’s control. Today’s figures reinforce that case, showing that global commodity prices remain a key driver of the rising cost of living in Britain’s households. The same argument doesn’t really work for the Chancellor, whose remit isn’t just to keep headline inflation down, but also to help households cope with the