Thursday, 15 December 2011

The BoE misses their inflation target (again)

The latest UK inflation number came out a few days ago. Unfortunately, I was too carried away with Cameron's historic stand against EU encroachment to pay any attention. The number fell slightly but a single snow drop doesn't mean that we will shortly be able to ski down Oxford Street.

UK inflation is the highest amongst the advanced economies. Since early 2005, inflation has been above target for all but three short periods amounting to 12 months out of a possible 77 months. More bluntly, over the last six years, the Bank of England monetary policy committee has met its mandated target in just 15 percent of the time. 

In normal circumstances, inflation occurs when an economy is operating above capacity. However, the UK has been operating massively below trend since 2008.  Why have prices increased while output has stagnated and unemployment increased?

The  thing that resolves this conundrum is quantitative easing.  The Bank of England has been printing money, which has driven up prices.  QE has also generated negative interest rates, which creates enormous uncertainty that in turn discourages investment.  Why would a firm build capacity today when there prospects of more inflation induced macroeconomic instability is on the horizon? 

QE isn't working.  We know this because the data tells us so.  It is time to try something different.


Weekend Yachtsman said...

Print money today, get inflation next year.

It's not exactly rocket science, is it?

otoh this government WANTS inflation: it reduces some of their debts, and quietly confiscates the wealth of the prudent (what little they have left after the Broon years) to reduce some more.

That's not rocket science either.

dearieme said...

On another blog I read that QE has had the BoE buying fixed interest gilts but not index-linked. Why might that be?

miken said...

I really fear the real reason for QE is that the government cannot get funding from elsewhere. Without QE they could not afford to pay for the public sector. It is a sad reality.

Dan H. said...

The sad truth is that the Government spends too much, and indeed tries to do way too much. If you will cast your mind back to the millennium Dome, and recall how grossly mismanaged that was then all will become clear. The saga of the Dome was not government acting unusually, it was politicians acting exactly as they do all the damn time.

They really are that crap at everything, all the time.

This is why everything is in such a mess; politicians ain't good at running stuff, they're good at looking like they're going to be good at running stuff. There is a subtle difference there, see.

Stevie b. said...

@dearieme - interesting question.

All I could find was this oldish comment:

If I understand the quote from the article correctly, they're excluded for "liquidity reasons", meaning presumably that Institutions/pension funds etc need them to at least partially fulfil commitments?

Wouldn't you think that the BoE would otherwise buy them up big-time if they saw a meaningful rise in inflation down the road?
Could be just 1 of the possible reasons (apart from manipulation) why gold seems under pressure?