If the UK is heading for deflation, it is hard to see it in the latest output and input prices. Both series are rising quickly.
Input prices, which includes fuel and materials, is now rising at over 20 percent a year.
Meanwhile, output prices are now increasing at over 6 percent a year.
What should the Bank of England do in the face of such alarming numbers? It should remember the old rule, every policy objective needs at least one policy instrument.
The MPC has one just policy instrument - the interest rate. It has two potential policy targets. It can either try to bring down inflation, which requires much higher interest rates, or it can try to save the housing bubble with lower interest rates.
After the last meeting, the MPC announced that it would go with the housing market, while inflation can take care of itself for a while. It cut interest rates by 0.25 percent. The consequences were easy to predict. Sterling is now sliding, and commodity prices will continue to grow at double digit rates. Inflation is likely to keep on rising for the foreseeable future.
Unfortunately, a couple of feeble interest rate cuts was never likely to save the UK bubble from an ignominious crash. The market is going down in flames. Nothing can save it.
During the last meeting, the MPC made the wrong choice; it would have been better to push the costs of the housing bubble back onto the financial sector. Since the banks created this mess, let them take the hit.
The MPC should have focused on its core mandate - price stability. It is time to start hiking rates again.