Wednesday, 6 August 2008

Inflation continues to rise

In June, the CPI inflation rate hit 3.8 percent. By September, inflation should be well above 4 percent and if the current trend continues, a 5 percent rate by mid-winter looks a distinct possibility.

Although the numbers are alarming, the lack of any coherent anti-inflation strategy is positively frightening. As each month passes, inflation climbs higher, yet all we here from the MPC is some lame story about a "balancing act".

So what is this infamous balance act? The last two MPC interest rate decisions have seen rates come down. Since then, inflation has climbed relentlessly. A casual look at the data provides sufficient evidence that these decisions were inappropriate and should be reversed immediately. Nevertheless, the MPC continues to "balance" the risks.

In the absence of a monetary tightening, the MPC are relying on the credit crunch to resolve the inflationary crisis for them. A 0.25 percent hike might actually push the economy into a recession, while a little patience might be all that is needed to return inflation to the 2 percent target.

Again, recent inflation data damns this strategy. Apart from two short periods, the inflation rate has been consistently above target since the middle of 2005. The MPC have been waiting in vain for inflation to moderate. In fact, their waiting game seems to be destabilizing inflationary expectations and the rate just keeps on going up.

Would a 0.25 percent rate hike be sufficient to push the economy into a downward tailspin? The economy has already slowed significantly, while unemployment is up. Unfortunately, this slowdown has put absolutely no downward pressure on prices.

A hike now would resolve a growing uncertainty that the MPC just doesn't have the commitment to bring inflation down. It would stabilize expectations. Wage setters would understand that any future increases will not be accommodated by a weak and indecisive central bank. As for the growth implications, a modest hike is unlikely to do much more damage than that already done by the credit crunch.

So, the UK needs higher interest rates and the sooner the MPC grasps this fact, the better. So, lets here no more about balancing acts, and lets see more action. Lets see the MPC develop a serious anti-inflation strategy.

4 comments:

Anonymous said...

I assume all that £100,000,000,000 and more that the BofE have lent the silly banking community to keep it's head above water was lent at 5%? Cheap money at the taxpayers' expense.

Somebody please tell me I'm wrong!

B. in C.

VADO said...

B.in C. No, you are not wrong.

Anonymous said...

http://www.nakedcapitalism.com/2008/08/inflation-conundrum.html

Good parable

Nick

andyrich29 said...

Alice,

I decided that the BOE are trying to avoid the economy going into the dreaded but inevitable R word.

Whilst this sounds obvious, a country going into the R word isnt good for normal decent people, despite the over exhuberance of the past decade.

However, in order to avoid going into the R word, you just know that the BOE are going to reduce rates at some point, thus prolonging the slowdown and causing misery for many more thousands of people.

How do you think the recent drop in oil prices is going to affect the price of things? I'm with you, inflation is built in from many years of low interest rates and higher prices.

With our huge personal debt, and the fact that everybody now has a convervatory (except me!) I fail to see anyway out of this mess.

Cheers
Andy