Just how long will it be before the Bank of England (BoE) accepts that inflation is becoming a problem? The members of the Monetary Policy Committee (MPC) have raised their inflation forecasts by a tiny bit. But as a group, they are sticking to their story that any spike in prices is temporary on the basis that there is "spare capacity" in the economy.
BoE governor Mervyn King has just written his ninth letter to the Chancellor explaining why annual Consumer Price Index (CPI) inflation is still so far above his target rate (3.2% instead of 2%). In it, he says that "spare capacity within companies and in the labour market will continue to put downward pressure on inflation." There are two problems with this: first, it clearly isn't; and second, it might not even exist.
As Peter Warburton points out in the Halkin Report, the Inflation Report shows that capacity utilisation in UK firms is running at about the same levels as it was in the middle years of the last decade ie quite high. Firms haven't hung on to surplus capacity throughout the crisis: in order to survive they had to "liquidate or perish".
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The result? "Supply conditions have tightened appreciably in the last year" at the same time as import prices have risen, pushing up costs across the board. So, while at the height of the crisis clothing and footwear inflation was -10%, today it is 0.7%. Transport inflation was -2%; today it is 5.8%.
The truth is that almost everything is getting more expensive in sterling terms. Food price inflation is 4.2%, but looking likely to hit more like 10% soon, given the rises in global commodity markets. And household utility bills will surge in the New Year as recently announced price rises kick in. Not much sign of a continuing downward pressure on inflation there, is there?
Still, not everyone thinks inflation is a bad thing. Ex-MPC member David 'Danny' Blanchflower is all for it. In an article in the Guardian this week he suggested that the solution to all our problems would be "five to six years of 5% inflation", created by keeping interest rates very low and chucking a bit more quantitative easing (QE) into the economy. If we had that, he says, we wouldn't need to bother will all this "austerity nonsense". House prices would rise, people would feel more confident and so get spending, and at the same time we would all get to "inflate away" our debt.
This might sound like a perfectly good idea. But it is actually rather shocking in its cruelty.
Who suffers most from inflation? Anyone with savings (note that 5% inflation would mean that the value of cash would fall by 35% or so over six years); anyone on a fixed income (pensioners and those on benefits); those with no assets and no debt; and the unskilled.
The well off, the professionals and the skilled can demand higher wages to match price rises, and they can enjoy the collapse in the value of their mortgage debt, and the debt held by their companies. If the worst comes to the worst, they can move abroad.
The others? They can't do any of these things. They get to sit and watch as their standard of living collapses around them. Inflation helps the rich and hurts the poor and vulnerable. It is an extraordinary policy to see being recommended in the Guardian.
-
What is the 25x retirement rule and does it work?The 25x retirement rule has been around for decades but many experts question if it is a suitable strategy
-
When is the self-assessment tax return deadline?If you are self-employed, rent out a property or earn income from savings or investments, you may need to complete a self-assessment tax return. We run through the deadlines you need to know about
-
'Governments are launching an assault on the independence of central banks'Opinion Say goodbye to the era of central bank orthodoxy and hello to the new era of central bank dependency, says Jeremy McKeown
-
Why investors can no longer trust traditional statistical indicatorsOpinion The statistical indicators and data investors have relied on for decades are no longer fit for purpose. It's time to move on, says Helen Thomas
-
Live: Bank of England holds UK interest rates at 4.5%The Bank of England voted to hold UK interest rates at their current level of 4.5% in March, as widely anticipated, after inflation rose to 3% in January
-
Bank of England cuts interest rates to 4.5%: full updates and analysisThe Bank of England voted to reduce the base rate by 25 basis points at the first MPC meeting of the year on 6 February. Full coverage as it happened from the team at MoneyWeek.
-
December interest rates: Bank of England keeps rates on holdThe Bank of England kept interest rates on hold at 4.75% in the final Monetary Policy Committee meeting of 2024. Full analysis from the MoneyWeek team.
-
Bank of England cuts interest rates to 4.75% – MPC meetingReporting from the Monetary Policy Committee November meeting. Full coverage, as it happened, from the team at MoneyWeek.
-
Inflation drops below Bank of England target for first time in over three yearsUK inflation slowed to 1.7% in September, boosting the chance of a more aggressive approach to interest rate cuts from the Bank of England
-
Bank of England holds interest rates at 5%The decision was widely expected, after the Bank of England warned interest rates would have to “remain restrictive for sufficiently long”
