Nov 12 2009
The Bank forecasts inflation to “rise sharply”
At last I find something the Bank has said that I can agree with. Inflation on the CPI will rise sharply late this year and early next year, and will rise above the 2% target. Their fan chart shows they think it could even rise above 3%, causing them the headache of writing a letter again explaining why they have failed. A year ago inflation hit 5.2% compared to the 2% target. The Bank’s course on inflation has been erratic and poor.
They argue that inflation will the subside again later in 2010, and will tend to be around the 2% target thereafter. Let’s hope that’s right. This forecast assumes no more quantitative easing after the £200 billion, and no further major devaluation in the pound. The Bank reminds its readers that market rates imply Bank rate will rise to 1.1% by Q3 2010, to 1.6% by Q4, and to 3.2% by Q4 2011. It may need to go up by more than that if the forecast of a stable pound is to be met.
The Bank is less sure of foot when it comes to the deficit. The Governor in his oral remarks implied that excessive borrowing had to continue in order to sustain the public sector part of demand. His report says that the debt ratio will need to be stabilised. In a masterly understatement they say this “will require some combination of a reduction in government spending and a rise in taxation as a share of GDP.”! Stabilising the ratio means not letting the proportion of debt to our national income rise any more. That would require spending cuts and or tax increases on a scale none of us have ever seen. For my part I cannot see why they should imagine any tax increases would help. The UK is not undertaxed. It is overspending. Higher taxes on individual and company income could make the position worse, driving away business and enterprise. We need more private sector jobs, demand and investment, not less.
Latest wage pressures show the public sector problem. The private sector has decided on job sharing and lower wages as a response to the recession. The public sector continues to push up wages unaffected by the downturn. As a result public sector pay is rising by almost three times as much as private sector. The public sector has to do more for less in the core services, and less for a lot less in the marginal areas. The longer the UK delays making the adjustment to the deficit the more painful it will be and the greater the burden of debt interest we will face. The Governor is irresponsible to suggest recovery needs the current profligacy. Countries that are recovering more rapidly than the UK have lower deficits. Too high a deficit will adversely affect confidence and lead to substantial financing problems in the future. Curbing the deficit will aid recovery. Failing to do so could lead to another crisis.
30 Responses to “The Bank forecasts inflation to “rise sharply””
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
There are many who say that the Governor has a far better economic track record than Mr Brown, without realising that they are being rather damning by faint praise. I can’t help feeing that the Governor is enjoying his period in the spotlight, and is becoming an increasing proportion of the problem by joining in with Mr Brown’s profligacy.
The twelve years that Labour has been in power have been used to distort Britain, and there is a compound effect in that distortion. It’s why the deficit numbers are so ludicrously large, and the sense of disappointment so crushing.
I used to hope that the Government of the day tried to organise things for the benefit of the Country, on the basis that they would be re-elected when the electorate realized just how good they were. Simple cause and effect. But this brave new world works on the basis of “you’re more rubbish than we are”, and “if you don’t vote for us, we can’t bribe you”.
Can we give them a computer game with a virtual country, and allow them to play their prejudices out without messing up the world that we live in? Then, with them out of the way, we can have a proper economic strategy.
“The Governor is irresponsible”.
As you know better than me, John, Mervyn King was one of the infamous 364 economists who wrote to The Times in 1981 to object to Mrs Thatcher’s economic policies. Those policies laid the foundation for one of the strongest economic revivals the country has ever seen – which only went off the rails when Labour changed course at the turn of the century.
Enough said?
The Bank of England’s position is rather difficult. It has to follow government policy, however flawed that policy might be. In some spheres it has a discretion to exercise but even then it must operate within overall policy dictated by the government.
I don’t complain about this, the legitimate repository for national policy in all fields is the government whether we agree with their judgments or not.
If I might say so, Mr Redwood, I do not think it fair to criticise the Governor for pitching his remarks within the scope of current policy. Were he to say “they’ve got it wrong” he would probably be accused of exceeding his authority and would follow Professor Nutt into the dog house.
Reply: He has no need to offer an opinion on tax cuts versus spending cuts given the political sensitivity of the issue. He needs to control inflation, which he failed to do.
How Gordon Brown can stand up at PMQs as he did yesterday & deny his fundamental role in this debacle is beyond me.
He has the largest National Debt proportionately of any OECD country apart from Eire. And yet, for purely party political advantage, he puts the the economy of the country seriously at risk by running the biggest ever deficit this country has seen in peacetime.
If parliament won’t rein him in & the BoE Governor won’t rein him in, the “Gnomes of Zurich” (or whoever it is that buys our gilts these days) will.
Gordon Brown’s legacy will inevitably be a bankrupt country. Can’t we (you John, or David Cameron?) do anything about it before 6 May 2010?
If the Conservatives were to make a “read my lips – no new taxes” (or even no net tax rises) promise it is something which would not only be economically desireable but a popular promise the Lab/Libs couldn’t match. It would give them a mandate for serious cuts in government parasitism. Only problem is that “cast iron” promises may no longer have any credibility.
Absolutely right John.
Look at the news today and I cant help but wonder why we have twice as many civil servants working in the armed services as we have servicemen (and women of course) and WHY on earth any of them feel entitled to bonuses?
There has to be an end to this reckless spending and I wish Cameron’s speeches reflected some of the understanding of economics and ideas to fix it shown on this site.
Why not write the letter about inflation in a thick black felt pen, making sure that lots of words were illegible. Then, perhaps a follow-up phone call?
Why cannot the State be cut back with its numbing toll of taxation, control and enforced lying just to get a “pot” of tax payers’ moneymoney?
Politicians are there for votes. Ministers, to get promotion or votes need to prove their effectiveness. Hence the string of “initiatives”. These look good, sound good and are of the “safety first”, “improving Motherhood” and “providing apple pie” variety. A pot of money is allocated for tangible results which look good in the “eye catching initiative” in the Times or Newsnight.
Down at our level, though, things are very different. First of all, the initiative never quite meets the local needs. For example, I am teaching a young mother English. She has to pretend that she is job seeking. The money, is allocated for Job Training, you see, not childcare. Two days ago a room full of people on full pay was being lectured on challenging behaviour. Who was lecturing? A very dominant woman. If I were a teenage boy, I should immediately rebel! I remember, on the dole, being faced, every single week, with either telling a pack of, yes, lies, or not getting my money. Now nurses have to get a degree. Why do they need a degree to make patients comfortable and peaceful?
So, no more tax rises, please. 50% tax is enough, surely, even for poor people.
Just get the state out of my face!
I absolutely agree as well. When you print money to attempt to circumvent the legitimate right of people to invest elsewhere, you create a long term and potentially
damaging paradox in the economy. Fiat money has its own and well documented disease, its called inflation. The supply of money cannot exceed the real value of the economy without this happening this is a golden rule and is based on reality rather than wish fulfilment.
“Why not write the letter about inflation in a thick black felt pen, making sure that lots of words were illegible. Then, perhaps a follow-up phone call?”
There should be no need, as most people grasp this fact very well indeed. Never the less your point raised a fit of the giggles. To much money chasing to few goods, equals inflation. Q.E. can only work if the banks hold on to the duplicate cash and are extremely cautious about releasing it. It will take discipline, and common sense to avoid the damage the dodgy money could inflict.
John
I have noticed how in the last couple of months, bloggers to your site seem to becoming increasingly more angry and frustrated at the “no corrective action” policy of the Government in their comments here.
Your site, of which you should be proud, seems to attract more thoughtful and knowledgeable content than may others. This is probably because of the detailed and well put arguments you put forward on your daily discussion topics. Which deserve sensible comment in reply.
I am but a simple small businessman, with my own thoughts on many subjects, and I have contributed on here on a regular basis for some time.
Many of your bloggers also contribute on a regular basis, with others making comment from time – time.
It is clear that you have on this site many contributors who are very, very knowledgeable in their own fields of either work or interest, and I am constantly amazed at the depth of knowledge shown and the logical arguments which are made, to support a particular point of view.
My own knowledge has been widened by reading such blogs, and in some cases my original thoughts challenged.
On this site in the last few months we have clearly had very experienced people talk about Finance, Transport, Global Warming, The Health Service, Defence, Afghanistan, The EU, Nuclear Power, Government spending, The Tax System, The Benefits System etc etc. and the common theme to all of these comments is, why does the Government not understand its policies on many of these are not working, why is nothing is being done to change things, why do we seem to be going backwards on so many fronts.
Whilst I fully understand that perhaps your site and its bloggers are not truely representitive of the views of population of this Country, it is clear that the level of anger and frustration is rising out here, as it is on your site, and politicians of all Party’s should heed that warning with concern.
Politicians (Government) it would seem are now trying to micro manage everything in our lives, and not only are they making a mess of it, the confusion, complication, frustration, and expense rises with it every year.
Perhaps we really do need to get back to basics in a big, big way, and Politicians need to understand that simplification can have huge merits.
Aware this is not on topic, but like so many others I am frustrated at seeing our Country fast becoming third rate, and I do not like it.
Reply: I agree. Many now understand that government is doing too much, badly, at too great a cost. It is also failing to do things it needs to do to keep the lights on , allow us to move around and to foster enterprise. Too many MPs think politics is about offering people their own money back, spent on things the MPs favour, instead of letting people make more of their own decisions with their own money.
When you consider that QE, now at £200B is used almost exclusively to buy gilts (i.e. government loan instruments) and fund government spending, it is unlikley we have seen the last of it.
This is because it now funds almost one third of all government spending (according to the China morning post anyway). If this is correct, the government can basically do four things
1. Cut spending by a third ~ no chance
2. Increase taxes very sharply ~ which kills any recovery
3. Borrow more from the market ~ who is lending? or
4. More QE ~
Which option seems more likely pre-election?
And as I have been saying for a while, in a year or two, we might see 3% inflation on a monthly not an annual basis because printing money destroys its value and leads to inflation.
The current policy is to ramp up inflation especially asset prices. Its important to note that the increase in money supply from QE i.e. printing £200bn is considerably more than £200bn!
The initial £200bn is now in the reserves of the banks, they will then lend it out to households & companies or Govt debt. This money then comes back into the banking system as more savings and increases the money supply as the initial 200bn is still there. Even if they remove the £200bn in 2 years time, it will have generated more than this in additional money supply!
Asset prices will rise first quickly followed by the general price level. Keynesians still believe they can out manoeuvre the long run Phillips curve even though it has been tested to death and failed everytime. Look out for big inflation followed by bust in 2012.
We are bankrupt. Inflation through years of borrowing and now printing of worthless money is bound to destroy any fragile recovery. We have seen nothing yet. The euro entry at a punishing 80p to the euro is inevitable at the moment. It would, however, benefit the big players, who can continue their pillage of the remaining bits of The UK economy. This will be folowed by a move of financial markets to Frankfurt and a dreadful cost to be borne by, guess who?
QE IS inflation. Inflation is a function of failed and exessively loose money – too much money printing and supplied at too low a price. The rise in the general price level is the result of this inflation, not its cause. Of course prices as measured by the discredited CPI (the previous tool used by Brown to con us about ‘inflation’) will rise. Our Pounds are smaller but the goods and services they buy are the same pre diluted currency value, so we need more currency units to buy the same quantity of goods and services. Why anyone is surprised by this result of Browns bonkanomics defeats me. The real question is how quickly we can winkle the idiot and his henchmen out of power before the damage they are wreaking becomes catastrophic.
The Bank’s forecasts are virtually worthless, for reasons well-documented by Edmund Conway in The Telegraph today – see http://blogs.telegraph.co.uk/finance/edmundconway/100001892/why-the-banks-inflation-report-is-useless/ . Never mind the obvious fact that their economic models cannot hope to reliably predict the eventual effects of the QE madness.
Perhaps you could explain what you mean by overspending. The government, yes, but do you mean that private sector employees are overspending also? Surely this implies that the only chance of a recovery for the UK would increased demand abroad, decisions out of our hands.
Reply: Private sector overspent in past years and is now paying off debt. Public sector is now the big spender of last resort, and is borrowing too much. yes, we do need to export more.
I have to come out of blog retirement or this one. Motive in creating inflation: The American Fed and the Bank of England, probably in co-operation, wish to re-inflate the housing price bubble on both sides of the Atlantic so that the banks’ ‘toxic assets’ become less toxic. That way banks may be returned to the private sector more quickly (PS Please tell Gordon Brown).
Public expenditure totals for 1996/97 and 2008/09 are given below in £bn in 2007/08 prices.
1996/97 2008/09
1a Public & common services 8.4 14.4
1b International services 4.0 7.0
1c Public sector debt interest 36.6 30.8
2 Defence 28.7 36.2
3 Public order & safety 21.1 33.1
4a Enterprise & economic dev 5.6 5.5
4b Science & technology 1.8 3.2
4c Employment policies 3.6 3.1
4d Agric., farming, fisheries 7.1 5.4
4e Transport 12.3 21.7
5 Environmental protection 4.8 10.2
6 Housing & community 7.5 14.8
7 Health 55.6 107.9
8 Recreation, culture, religion 7.4 13.0
9 Education 49.1 80.8
10 Social protection 146.7 199.1
EU transactions (rebate?) -6.7 -2.9
Unallocated -0.8
Accounting adjustment 17.4 23.2
Total 410.8 606.0
Health, education and social protection account for 70% of the increase.
We need to get the control total down to £500bn (in constant 2007/08 prices) over the course of the next parliament. Suggestion: Factor up the 1996/97 numbers to the control total, then factor down the 2008/09 numbers to the control total, then make your plan.
John of Enfield: “How Gordon Brown can stand up at PMQs as he did yesterday & deny his fundamental role in this debacle is beyond me.”
John it could be worse, he might still be a polytechnic lecturer educating our children.
Completely agree. Mervyn King has got to go. I had to mention something I just heard on CNBC regarding RBS. Apparently, Stephen Hester et al have applied for a license to allow champagne to be served at their offices from 7 am till late and for live entertainment to take place there – all just in time for their Christmas party! Wish we could be there – especially as we’re paying for it!!
JR, do you think it possible that Britain can pay its debts without inflating? Debauching the currency, said Thorold Rogers the Victorian economist, historian and MP, is the single biggest crime a government can commit against its own people. Do you agree?
Reply: We are inflating, as we have done throughout the post 1945 period. Inflation is theft from savers by those who print the money.
I think in fairness Mervyn King has expressed his concerns about the deficit on numerous occassions. Inflation is really inevitable and I don’t mean 3%. Quite frankly we will never be able to pay off this debt in 2009 pounds. We would have to run a higher surpus than Lawson did (with the help of peak North Sea Oil) for decades to pay this back. The prospects of us getting to a balanced situation where we are not adding to debt at a rate higher than our standard level of growth (whatever that is after this shambles) means the deficits will continue under the next Government and the one after all the time adding to the level of indebtedness. How can we hope to get to surplus? Its just not possible. Inflation combined with depreciation is the only way out.
Fixed typo…
I’m sure the only reason why UK govt debt is still AAA rated is because the agencies are discounting the probability of Labour no longer being in power post election. And, that , the election can’t come soon enough.
Gordon Brown is printing money, its in his personal interests to ensure that nominally certain assets have the same sterling number attached to them (housing). He figures people don’t realise that against most hard assets he’s already robbed them.
Now, QE, is simply taking money from the prudent and giving it to the profligate. RBS is simply another British Leyland, one day it will be gone, and people will wonder why we ever wasted so much money on it.
As for Mervyn King, he’s deliberately talked down sterling. I think his policy is idiotic and I hope, when the Conservatives gain power, they fire him. Give him a black bag, tell him to pack his belongings into it, and get security to escort him out of the building.
I went to some trouble to insert spaces within the lines of my blog response so that two columns of figures would be clearly presented in juxtaposition for easy comparison. The blog programmer has gone to an equal amount of trouble to remove the spaces, thus making my comment very difficult to read and understand. It appears that the Labour government is not the only source of people who intervene strenuously to negative effect.
Reply: I am sorry that has happened. I did not make it happen!
Mervyn King has at last uttered the words “inflation rising sharply”. We were told that deflation was the main problem and that Quantitative Easing was the answer. Many of us didn’t believe this, but King has printed £200billion of funny money supposedly to offset the effects of deflation. We have had NO deflation by the Bank’s and the government’s own measure of inflation, the CPI. This funny money has all been used to “finance” government debt. Now we are told to be concerned about the thing that many of us have feared all along hyper-inflation created by this government and their lackeys in the Bank. There is a lack of honesty about the whole financial crisis. I ask again – are the Conservatives sure that they want to give more control to Mervyn King and the BoE?
Several people have noted the attempt to ignite inflation via QE is motivated by a desire to push nominal house price inflation to the point where banks’ loan books look less under the water in nominal terms marked against a current house price “market”, in theory allowing the bankrupt banks to be sold. However, inflation is default. Now the emperor’s clothes can be seen for what they are, no intelligent buyer is going to be fooled. Look at the prices for mortgage securities, not at the prices for houses.
Out of the £1,200 billion mortgage debt outstanding, some £700 billion has been borrowed abroad (and this increase is just since the end of 2000, when all mortgages were essentially domestically financed). There are over 11 million mortgagors, so the average debt exceeds £100,000, with those who re-mortgaged at the top of the market owing close to £150,000 on average. At the present artificially low interest rates most can afford their mortgage while they remain in work, on average paying a little over 5% interest (the biggest margin over bank rate ever, I believe). If we see high inflation and mortgage interest rates of 15%+ as we did in the 1970s and even the 1990s, the damage will be colossal, since earnings will not keep pace with the mortgage bill – especially after tax. House prices will correct in real terms – more viciously in a high inflation environment than in a low inflation world.
As I have pointed out before, QE has the nature of a shelf issue – the gilts have not been sold to genuine third parties (indeed, until Brown’s ill fated reorganisation in 1997 the DMO was simply a department at the BoE, so a QE gilts issue would have been a loan from the BoE to itself with cash passed to the Treasury to spend). If QE is halted we will see a much truer market price for gilts, which will reflect inflation expectations, and interest rates will follow. Losses will hit the BoE balance sheet if it marks its holdings to market – will it bail itself out, or be forced to borrow from other central banks? Will it be able to sell the stock of gilts it now holds under QE to absorb and prevent inflationary expansion?
In addition to the straight deficit that has to be financed and the sale of the existing QE gilts, there is also the need to issue gilts to replace those maturing. Out of the £859bn currently “issued” (i.e. including held under QE by the BoE) there is £15.6bn due on Dec 7th this year, £28bn in 2010, £60.3bn in 2011, £48.4bn in 2012, £55.5bn in 2013 and £57.2bn in 2014 according to the DMO (includes current value of indexed linked issues):
http://www.dmo.gov.uk/reportView.aspx?rptCode=D1A&rptName=54474093&reportpage=
Foreigners continue to be net sellers of gilts, reducing their holdings in the 2nd quarter by £8.4bn. They are voting with their feet. Net immigration is down: the concentration of the media is on the reduced inward flow and the East Europeans returning home or going elsewhere in the EU with better prospects. Unspoken and unremarked is the outflow of citizens emigrating because they fear for their future and the value of their accumulated wealth if they stay here, but they are also voting with their feet.
Inflation will be imported as the BRIC countries increase demand. China already knows this which is why they are investing in Africa.
What does the BofE do when they can’t control imported inflation directly? The only option when you can’t supress investment is to supress consumer demand. Interest rates are to become blunter instruments. They will be used like a bludgeon rather than a scalple. I believe you will have to raise rates by about 30% more than you used to to control inflation. There is a cost to being a lesser nation.
Inflation is natures way of putting us in our place. As we slide down the economic league, inflation – one way or another will leak into our economy like water in a flood leaks into a house.
Oh dear. Wake up and smell the coffee.
My policy prescription would be to restore RPI-x as the inflation target and to set it at 2%.The MPC would have to hit that and its members would serve seven year fixed non-renewable terms so that reappointment could not be used to exert pressure on the MPC members to secure lower interest rates at politically handy times.Giving the MPC the power to curb bank lending to stop asset price bubbles getting out of hand could enhance economic stability.Banks should have to build up bigger capital balances in a boom to sustain lending in a bust and yes we should have QE in a deflationary situation if interest rates can go no lower.
But at the present time I think that capital balance sheet requirements for banks should be relaxed while all the money given the banks should face a 3% interest charge unless lending to good businesses and mortgage lending increase sharply. We need to get credit flowing again or we cannot get a decent economic upswing going.
We need an attack on inflation as it is a social and economic ill. But we should end the FSA so that the chain of economic command is clearer. The Bank of England has centuries of bank supervision experience – lets use it to try & stop future banking disaster.On Northern Rock no one knew what they where supposed to be doing as the authorities sleep-walked to disaster.It was right to guarantee bank deposits and to pump money in to stop the banks failing and a depression being caused.But we need change to stop inflation returning and to get credit flowing again.Then we need a sound platform of greater economic stability.
We should never be complacent on inflation as left to get out of hand and it can devastate the economy and ruin the lives of millions.Keeping it low means that public sector pay & benefits need only minimal increases thus helping the public finances.
Implementing reforms to generate £120 billion in public sector expenditure savings over five years as suggested by the CBI should stop private investment & expenditure being crowded out by Big Government.By taking action on spending & borrowing you can protect the UK’s AAA Credit Rating and thus avoid the collapse of the £. A sudden plunge in the £’s value could fuel inflation, lead to higher interest rates and a depression. So the Tories need massive reforms to shrink the public sector to save the economy from an even worse slump.
Inflation is not a good thing – a stable,low inflation economy is far better.
There are three questions I’d like to put to the people who contribute to this site.
1/ There was a response on the Burning Our Money site a few days ago saying that £250 billion was “destroyed” in the financial crisis, and therefore printing up to this amount of money via QE will have no effect on inflation. I feel this is nonsense, but I’m no economist, and I’d be grateful if someone could counter this statement.
2/ William Keegan at the Guardian seems an eminently sensible sort of bloke. He writes highly erudite articles on economics where he often likes to concentrate on the failings of previous and future Conservative governments. He refers to a report in his latest article that indicates consumer spending is heading down over the next two years, whilst unemployment is heading up. But then ends his article by saying; “And the Conservatives are planning drastic cuts in public spending!” as if it were the most outrageous thing he’d ever heard. Could somebody explain why he thinks that cutting waste in the public sector is a bad thing?
3/ Why can people post comments at the end of Daily Telegraph articles, but not at the end of Guardian articles?
Replies:
1. Printing money is inflationary, unless the banking system is so weakened that the banks cannot pass on the new money and multiply its effects.
2.They believe that all public spending is good as it creates incomes for someone. They ignore the impact too much public borrowing can have on interest rates and inflation, which may damage private sector activity by more than the gain in public activity.
3. Maybe they cannot trust their readers to write within the law of libel.
Having now thought about this, I can say that if I was a lawyer defending a counterfitter, I would now advance the defence that my client was in fact restoring liquidity to a shattered financial system and implementing government policy by creating a fiscal stimulus which was in fact helping people and thus it is impossible to oppose such a measure as it is supported by the Bank of England much less criminalise it as it is government policy, it could not therefore be essential and criminal at the same time as this is against the law of natural justice.
Can anyone tell me why such a defence would be immoral ? Surely the same laws should apply to both government and the people.
Reduction in public expenditure is the one and only valid policy for any government in UK at the moment. I am certain that Mr Brown lacks the political courage to do what is right and I wish I was certain that Mr Cameron would reduce spending.
In my more despondent moments I believe that perhaps the best solution for the UK would be to invite the IMF in because they would dictate what the politicians find too difficult.
Gordon Brown’s and Barrack Obama;s places in history as debasers of their respective currencies are only now beginning to emerge but their record in this respect will last when many of their lesser errors are forgotten
Perhaps the government should read a bit of Keynes in the original, rather than second hand from somebody who remembers a bit from their A levels.
Keynes talked about an economy which got stuck in a rut. There was a deficiency of aggregate demand because the unemployed had no money to spend. There was insufficient demand for labour, because there was no demand for the goods that were produced.
Government stepping in with a fiscal stimulus can give jobs to the unemployed, who spend money in the shops, which creates more jobs, which generates more expenditure and so on, until you get back to full employment. In modern parlance the government spends its way out of recession.
Leaving aside the truth of the theory, it does not apply in the current crisis. As you have said many times before Mr Redwood, the crisis is caused by an asset price bubble as a result of low interest rates and masses of liquidity flooding in from the Far East. In this country it was compounded by eight years of fiscal stimulus. The recession is not as a result of a deficiency of aggregate demand, but due to an excess of demand fuelled by low-cost borrowing in both the private and public sectors. The recession may have been triggered when interest rates were raised too high, but this made sooner the day of reckoning.
The recession is now needed to get borrowing and asset prices down to sustainable levels. A debt financed fiscal stimulus is not just ineffective. It is the exact opposite of what is required.