After a month or two of complacency, I’m back to worrying about inflation. Not just because I’m a substantial net saver and inflation is very bad news for me but because the damage it will do to our fragile economy is enormous. Unless, of course, you’re a bank with big, unrevealed debts on your balance sheet or a government with the biggest ever national overspend.
At the moment the Bank of England – by sticking to the received wisdom of neo-Keynesian economics (by which I mean the kind of Keynesian economics that Keynes never proposed) – is playing fast and loose with its reputation. Here’s the Wall Street Journal:
Rising core inflation may indicate firms feel confident enough to be rebuilding margins, which would be at odds with the BOE's insistence on a substantial U.K. output gap. Or it could reflect the continued impact of the 25% devaluation in the trade-weighted value of sterling. Either way, it raises questions about the accuracy of the BOE's inflation model; as Fathom Consulting points out, U.K. GDP is now 12% lower than the BOE forecast in November 2007, while inflation is 2.5 percentage points higher.Each month the Bank’s excuse is that “temporary factors” are to blame – this time it’s the rise in duty on beer and fags that’s identified as the culprit for a sharp spike in the rate. But most forecasters – presumably using the same factors – were at or around 3.5% rather than the 3.7% of the headline rate. But the Bank still argues that:
“…higher oil prices, a rise in value-added tax to 17.5 percent from 15 percent at the start of the year, and past falls in sterling were driving prices higher, but were only short-term factors that would abate over the coming months. The temporary effects of these factors are masking the downward pressure on inflation from the substantial margin of spare capacity in the economy,”
In other words, we’re still facing deflation rather than inflation. But the Retail Price Index (RPI) has jumped to 5.3% - despite the continuing downward pressure on mortgage rates! The reality – month after month – is that we have never been in a situation of deflation and now we are lurching dangerously towards a possible further acceleration in rates. Maybe this is temporary – I hope it is for sure – but when the Bank doesn’t understand how service industries don’t carry capacity gaps like manufacturers and that the real economy is not sustained by unearned money but by the creation of real added value.
Sadly UK based economists (with notable exceptions) continue to peddle the Bank’s line that inflation will quickly fall back. Fortunately we have the Yanks to keep us straight on these matters!
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1 comment:
To all those who insist on a terror of "deflation", I ask this: suppose the governments of the world had, 30 years ago, implemented a ruthless programme to prevent prices falling in the computer and other tech goods markets. Suppose they had successfully maintained computer prices at their 1980 level.
How many of us would now be able to afford to discuss these things on the internet, and how much money would they have had to print to achieve their goal? And how high would prices of all other goods have risen to create "stability" and "protect jobs" in the computer industry?
And if it is absurd to stabilise the prices of computers, why is it sensible to stabilise the price of bread?
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