Tuesday, 17 June 2008

The only way is up

Today, the denial stopped - the UK has a serious inflation problem. Currently, the rate stands at 3.3 percent. The RPI rate is well over 4 percent. Underlying producer prices are growing at almost 10 percent. Food prices are out of control. Just thinking about fuel prices is enough to make you want to sell your car. No wonder inflationary expectations are rising.

If the Bank of England doesn't get a grip of the situation, inflation will probably hit 4 percent by the end of the summer. Once inflation hits 4 percent, then 5 percent doesn't look so far away. In fact, a rate somewhere close to 5 percent by Christmas is beginning to look like a real possibility. Then, in January, the UK starts its annual wage setting negotiations. By then, inflationary expectations will be running wild, the surge in inflation that we have experienced over the last few months, could well become deeply entrenched.

There is, thankfully, an alternative. It requires the Bank of England to immediately raise interest rates by 0.5 percent. The Bank has to demonstrate to the rest of the economy that it is serious about reducing inflation. Once price and wage setters understand that today's number was an aberration and the Bank will it out, expectations will stabilize and everything will calm down.

31 comments:

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aSteve said...

My interpretation of the King/Darling letter exchange published today is that we're in for a hold at the next meeting - then, when CPI reaches 4% a month or two later, there'll be a policy shift to tightening... slowly.

The letter exchange, in my opinion, said one thing loud and clear: a (technical) depression is on its way. Material affluence will decline because wages can not rise as strongly as prices.

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Markbaldy said...

I think CPI atands for "Convenient Price Index" - it is below the real level of inflation and is the tool which Gordon Brown and his spin doctors uses to pay people rubbish wages.
The letter from King to Darling should read a bit like this..."Because interest rates were reduced a few years ago to keep the house bubble going - due to pressure from Gordon Brown and his cronies, we are now in a mess.
Even the fudged inflation rate is above your target.
Perhaps we should come up with a new official inflation rate to con the UK public... only include the price of sheep in Mongolia perhaps"

Alice Cook said...

Those bloody spammers have driven me mad this afternoon, 24 spam comments on this post alone. But I deleted every last one of them!

asteve, the case for higher rates will become more compelling with each month of higher inflation. The rate increases will come, and sooner would be better.

mark - I think it is now an established view among all reasonable commentators that the CPI understates the true level of inflation. It is ironic that even this grossly distorted indicator is now flashing red - inflation is back and there is only one cure. Rate increases.

Alice

traderboy said...

have a look at the inflation data...the next 2 numbers to drop out of the Year-on-Year calculation are from last June then July, which respectively were +0.2% and -0.6%...even if the next 2 months show ZERO price increase, the CPI is going up further...type the numbers into a spreadsheet and play around with it...it's a near-certainty to be above 4% in 2 months time.

Alice Cook said...

Trader boy, that is a good idea for a post. I will follow your advice.

Alice

Edward Harrison said...

From what I've seen regarding the statement Mervyn King made in the letter to Chancellor, the BoE looks like a dove. I don't see rates going higher except via a token gesture of 25 beeps.

http://www.creditwritedowns.com/2008/06/boes-inflation-letter-to-alistair.html

As I've said, the BoE and the Fed want inflation to erode the debt burden AND bring house prices (in inflation-adjusted terms) down without having them crash. What say you, Alice?

Edward