My recent post on inflation upset a minority of readers. The criticisms took three forms:
Inflation – its not going to happen
Despite the huge increase in monetary growth, some are profoundly skeptical that inflation is going to pick out. Of course, no one can know what the future will bring. I could be wrong when I say that inflation will rise. Furthermore, I would be happy to be wrong. A 5 percent by the middle of next year inflation rate is the last thing I want to see.
In the short term, I expect inflation to keep on falling. By the late summer, it could be as low as 1.5 percent. The short period deflation last winter did knock the wind out of rising prices.
However, that stopped in February, and since then the monthly inflation rate has been painfully high. By next winter, I expect inflation to rise, and within two years, it could be a serious problem. By that, I mean a rate somewhere between 5-10 percent. If the MPC raise rates, then this prediction is nothing more than a gloomy alternative scenario that an appropriate policy tightening successfully avoided.
With each passing month, we will pick up more information about the likely path of inflation. The following simple rule will help enormously. If the monthly inflation rate is 0.15 or lower, then the Bank of England can rest easy. It will easily meet its inflation target. If the monthly inflation rate is about 0.3 percent, then it is in trouble. We can be fairly confident that inflation will hit 4 percent by December. Of course, if the monthly inflation rate is consistently negative, we have deflation.
How dare you suggest an interest rate rise!
Some people become extremely agitated by the idea that the price of money should increase. Some think that rates should remain low in order to help homeowners pay down their ridiculously large mortgages. This amounts to an argument that savers should subsidize borrowers. Personally, I don't see any compelling reasons why this should be so.
Others seemed to think that low interest rates will sustain the economy and keep unemployment at bay. I have a lot more sympathy for this argument. Recessions are nasty and miserable.
However, historical experience suggests that a surge in monetary growth can only have a temporary effect on output and employment. In the long run, more money means higher prices. I wish that wasn't so, but it is, and denial helps no one.
You are just a bitter renter
Well, I've never tried to hide that fact. It says it on my profile in proud letters. If you don't like the bitterness, then this isn't a blog for you. Move on, find your happiness six elsewhere, because I'm not going to provide it for you.
Besides, bitterness is something that the Brits do very well. Personally, I don't feel the least bit isolated. This is the country full of anger and despair, and this blog in part, reflects that fact.
So, returning to the inflation question, who knows? Maybe everything will be all right in the end, and people can read this blog and tell me that I was wrong. I'm ready for that.