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Typical ex BOE WANKER!
The inflation option looms larger, either by stealth or through design
Soon after the financial crisis began, a friend confidently proclaimed that the only way out of the mess that it had created would be inflation.
Like trains suffering from the wrong sort of snow, Britain is gripped by the wrong type of inflation, where rising oil and commodity prices have squeezed wages, writes Roger Bootle Photo: Peter Jolly
By Roger Bootle
9:48PM GMT 17 Feb 2013
51 Comments
I demurred. Inflation might in the end be chosen, or it might just happen anyway,
I said, but the politicians and central bankers just weren’t ready for it yet. They had to try austerity for several years first.
If that looked like working, and especially if the economy revived, then the inflationary denouement would be avoided. It would be a repeat of what we have managed a few times before, working debt down gradually through a varying mixture of austerity, low interest rates, growth and mild inflation.
But if, after several years of austerity, the deficit was not appreciably lower and the economy showed scant sign of recovery, then higher inflation would seem attractive. Although I say it myself, that wasn’t a bad judgment. Has the inflationary moment now arrived?
Last week, the latest figure showed CPI inflation stuck at 2.7pc. It looks likely, though, that in coming months it will rise, peaking at 3pc or above. According to the Bank of England, the rate will continue above the 2pc target for more than two years. To those of a cynical disposition, this represents the authorities pursuing the inflation solution by stealth, which they have been doing for a few years already.
Actually, I don’t think that they are quite right. True, the authorities have tolerated high inflation rather than seeking to bring it down by tightening policy because they have judged that this would have depressed the economy. But I don’t think that they have actually welcomed the higher inflation as alleviating our predicament.
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That has depressed the tax-take.
From the standpoint of reducing the deficit, the right sort of inflation is the sort that carries pay up with it. That generates more income tax and VAT. Incidentally, it also meaningfully reduces the burden of consumers’ debt, including mortgages. But this is precisely the sort of inflation that the authorities have not endorsed – and indeed that we have not had. What’s more, it looks like staying that way.
Interestingly, the radical-sounding measure, “helicopter drops” of money, recently advanced by Lord Turner, is not defended on the grounds that it would bring on the much-needed inflation (although that has been part of the case for it in deflation-afflicted Japan).
Rather, the case has been that this would spur economic recovery without necessarily increasing inflation.
Even so, I can detect a slide towards higher inflation. The Bank has now extended the period over which it will look through inflation being above target.
The new Governor may be more aggressive in his embrace of more expansionary policy, even if it risks inflation staying higher for longer. And in current circumstances adopting a target for nominal GDP rather than inflation would facilitate the tolerance of higher inflation. Suppose the target were set at the plausible level of 5pc. If real GDP were static, this would allow the Bank to tolerate inflation as high as 5pc.
But the most important aspect of this debate concerns a subject that the authorities feel they cannot address directly, namely the exchange rate. There is a limit to what they can do, or even say, for fear of being accused of engaging in competitive devaluation by our friends in the G20. In practice, this would be a bit rich, since we are running a substantial trade deficit and have been banging on for years about the need to boost demand in the surplus countries. If any country would be justified in trying to gain an increased share of world markets, it is us.
The process has already started sotto voce, with the pound down by about 5pc since its recent peak. But there could still be some way to go. After all, it is about 9pc above its 2008 trough. A lower pound would undoubtedly tend to push up inflation. Under the old, narrow interpretation of the policy regime, this might be taken to require an increase in interest rates, which would hit the economy and threaten to undermine the attempt to keep sterling down. The various forms of policy flexibility should be seen as ways of avoiding this, while maintaining policy credibility.
In recent British history, there have been times when the exchange rate has been the lodestar for economic policy, and others when it has been sent offstage, as now. But even in those times, you must never forget its importance. The pound is usually at the centre of things when the British economy goes badly wrong – and usually at the centre of whatever must be done to put it right.
Roger Bootle is managing director of Capital Economics.
roger.bootle@capitaleconomics.com
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The inflation option looms larger, either by stealth or through design
Soon after the financial crisis began, a friend confidently proclaimed that the only way out of the mess that it had created would be inflation.
Like trains suffering from the wrong sort of snow, Britain is gripped by the wrong type of inflation, where rising oil and commodity prices have squeezed wages, writes Roger Bootle Photo: Peter Jolly By Roger Bootle
9:48PM GMT 17 Feb 2013
51 Comments I demurred. Inflation might in the end be chosen, or it might just happen anyway,
I said, but the politicians and central bankers just weren’t ready for it yet. They had to try austerity for several years first.
If that looked like working, and especially if the economy revived, then the inflationary denouement would be avoided. It would be a repeat of what we have managed a few times before, working debt down gradually through a varying mixture of austerity, low interest rates, growth and mild inflation.
But if, after several years of austerity, the deficit was not appreciably lower and the economy showed scant sign of recovery, then higher inflation would seem attractive. Although I say it myself, that wasn’t a bad judgment. Has the inflationary moment now arrived?
Last week, the latest figure showed CPI inflation stuck at 2.7pc. It looks likely, though, that in coming months it will rise, peaking at 3pc or above. According to the Bank of England, the rate will continue above the 2pc target for more than two years. To those of a cynical disposition, this represents the authorities pursuing the inflation solution by stealth, which they have been doing for a few years already.
Actually, I don’t think that they are quite right. True, the authorities have tolerated high inflation rather than seeking to bring it down by tightening policy because they have judged that this would have depressed the economy. But I don’t think that they have actually welcomed the higher inflation as alleviating our predicament.
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13 Feb 2013 - Savers warned on rising inflation
12 Feb 2013
That has depressed the tax-take.
From the standpoint of reducing the deficit, the right sort of inflation is the sort that carries pay up with it. That generates more income tax and VAT. Incidentally, it also meaningfully reduces the burden of consumers’ debt, including mortgages. But this is precisely the sort of inflation that the authorities have not endorsed – and indeed that we have not had. What’s more, it looks like staying that way.
Interestingly, the radical-sounding measure, “helicopter drops” of money, recently advanced by Lord Turner, is not defended on the grounds that it would bring on the much-needed inflation (although that has been part of the case for it in deflation-afflicted Japan).
Rather, the case has been that this would spur economic recovery without necessarily increasing inflation.
Even so, I can detect a slide towards higher inflation. The Bank has now extended the period over which it will look through inflation being above target.
The new Governor may be more aggressive in his embrace of more expansionary policy, even if it risks inflation staying higher for longer. And in current circumstances adopting a target for nominal GDP rather than inflation would facilitate the tolerance of higher inflation. Suppose the target were set at the plausible level of 5pc. If real GDP were static, this would allow the Bank to tolerate inflation as high as 5pc.
But the most important aspect of this debate concerns a subject that the authorities feel they cannot address directly, namely the exchange rate. There is a limit to what they can do, or even say, for fear of being accused of engaging in competitive devaluation by our friends in the G20. In practice, this would be a bit rich, since we are running a substantial trade deficit and have been banging on for years about the need to boost demand in the surplus countries. If any country would be justified in trying to gain an increased share of world markets, it is us.
The process has already started sotto voce, with the pound down by about 5pc since its recent peak. But there could still be some way to go. After all, it is about 9pc above its 2008 trough. A lower pound would undoubtedly tend to push up inflation. Under the old, narrow interpretation of the policy regime, this might be taken to require an increase in interest rates, which would hit the economy and threaten to undermine the attempt to keep sterling down. The various forms of policy flexibility should be seen as ways of avoiding this, while maintaining policy credibility.
In recent British history, there have been times when the exchange rate has been the lodestar for economic policy, and others when it has been sent offstage, as now. But even in those times, you must never forget its importance. The pound is usually at the centre of things when the British economy goes badly wrong – and usually at the centre of whatever must be done to put it right.
Roger Bootle is managing director of Capital Economics.
roger.bootle@capitaleconomics.com
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Roger Bootle
In Finance »
Top 10 coolest offices in the UK
Autumn Statement: family tax bombshell over new black hole
Debt crisis: live
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osoweary
1 minute ago
Well done for finally catching up, Roger!
Yes, inflation is one of the several ways in which we are all paying for the profligate debts racked up; along with increased taxation, lower real-terms wages, unemployment, and erosion of pensions and savings.
Given the amount of money injected, the remarkable thing is that inflation is so low. That's a sign of just how huge the deflationary pressures of debt deleveraging are. And then, you see that debt in UK is actually rising......
So: where next?
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BigKato
2 minutes ago
I understand that wage Inflation is lower than CPI Inflation,
but the question is,
as this is not a normal recession,
Is it better to be in work with a lower wage , or out of work and home as Mr Reece said recently, if Interest rates go up ,
As you cannot have it both ways,- Recommended by 0 person
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BigKato
11 minutes ago
Roger
At last a sensible article on Inflation,
Not the usual as per the Inflation Nutters banging on about QE and Inflation getting out of control as Mr Lillico said it would by 2012, saying Interest rates may have to go too 8% !!!
And I Never made the name up Inflation Nutter, so it is not personal, all it means is those with their own agenda, (just need to look at Mr Sentances comments over last 3 years)
You mention Inflation at 5% , MPC say Inflation maybe over over 3% for next 2 years then falling back to target,!
Now Inflation Nutters will say the MPC have got their forecasts wrong again, but before you do, just look at your own forecasts !!
My question to the Inflation Nutters,
As you were all wrong about Inflation being out of control by 2012, and Mr Sentance also wrong about no double dip recession, or as Liam calls him( Mr Courageous).
Can you please, rather than bang on about it, tell me when (what year) that Inflation will be out of control and what figure constitutes Inflation being out of control ???- Recommended by 0 person
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whitewolfe
26 minutes ago
how about we clean the bad debt that is choking the economy by raising the rates and terminating the QE. If we would have done that in 2008 we would be out of the crisis by now. The problem of course is that roger always goes for the easy way - inflation - which anyone knows is the wrong way.
The right way is the hard way!- Recommended by 0 person
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tom_archer
48 minutes ago
Sterling falling and rocketing Chinese wages are set to turn £ shops into £2 shops before long, and now that Dobbin has been taken off the menu, burgers are going to cost a whole lot more too.
Rising prices while wages stay the same is going to keep the depression going for some time yet..- Recommended by 3 people
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Jason Aris
Today 04:16 AM
What do you expect, those at top have the view that the hoi poloi/plebs have gotten to big for their boots and are expecting a living standard which is beginning to impinge on the 'elites' exalted lifestyles (they view every package holiday to Majorca uses 'their' oil so must be stopped).
Due to the incidious nature of its effect inflation is (and always has been) their chosen weapon to rob the masses of any gains made over the past forty odd years. What did Keynes call it 'the silent thief'
The difference is a lot of people, due to the power of the net, know what is being done and are taking appropriate action (Precious metals, de-camping to other parts of the world) so their 'medicine' is not working and they are begginning to panic.- Recommended by 0 person
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ianbio
Today 04:14 AM
We are wrong to call the price rises we are seeing today "inflation". Inflation is where the value of money falls. What we are seeing today is "real" increases in price due to supply and demand and resource constraints.
In the same way, the apparently low inflation of the so called NICE decade was no such thing. It comprised a significant level of true inflation, masked by real falls in prices of most manufactured goods due to globalisation.- Recommended by 1 person
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tom197482
Today 04:11 AM
Meanwhile, most people's wages are stuck where they were in 2007. So inflation will do wonders for demand in the economy, won't it?- Recommended by 0 person
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dempster
Today 03:10 AM
This article purports that inflation and austerity are two different animals.
Whereas for those who have had no wage or pension increase, it is the same thing.
Inflation is austerity for those seeing no income rise to match it.- Recommended by 10 people
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hawhaw
Today 03:07 AM
Hey Engleesh
''The Bank has now extended the period over which it will look through inflation being above target. The new Governor may be more aggressive in his embrace of more expansionary policy, even if it risks inflation staying higher for longer''
The whole of the stinking system's press is awash with this kind of diversionary nonsense. (Not your fault Roger).
If we had politicians with an ounce of courage they would stand up and say quite simply...
We all have to accept a lower standard of living.
Better that we accept this than inflationary theft by default.
Better that it be a managed transition than a random event.
We will guard the most vulnerable against the worst effects of the transition.
We will remorselessly strip those guilty .. of their assets and employment.
No one will get anything from the government unless they are destitute in which case they will receive food shelter and education but not money.
The government will balance its books every year no matter what and public servants who fail to achieve their objective in this will be simply dismissed without payment or pension.
No one is going to die if they have to accept a well managed 20 per cent reduction in GDP per head.After this transition - we may have a sustainable base for recovery.
Dream on- Recommended by 5 people
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Gerard Schmidt
Today 02:34 AM
Inflation and austerity were both options.
Accepting the reality that the banks were insolvent wasn't.
(Edited by author 2 hours ago)- Recommended by 7 people
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dempster
37 minutes ago
To Gerard Schmidt
Beautifully put.- Recommended by 0 person
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thedudeabidesman
Yesterday 07:23 PM
yeah, that's right, yeah....hey this guy really knows his stuff so you best listen to him!
hey wait a minute ..ain't this the guy who got £250k of worthless paper for putting forth a useless idea of a euro solution?
yeah, that's right, these guys know what's going on. its best you listen to them.
blind monkeys who feed the beast. people wake up.- Recommended by 4 people
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emmiem
Yesterday 07:14 PM
The G20 Finance Ministers meeting in Moscow endorsed Japan's devaluation although I'm sure privately they're grinding their teeth. Lagarde went as far as to say it was 'sound policy'.
Well it's difficult to condemn Japan when they're all dying to get back home and restart the printing presses themselves isn't it?
I'm glad you've detected a slide towards higher inflation Roger. Was the use of the word 'slide', (implying a downward trajectory), a Freudian slip? - or was your subconscious having a bit of fun?
Anyhow, you should go shopping more often. You might be surprised at what else you detect.- Recommended by 9 people
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victormeldrum
Yesterday 07:01 PM
Politicians tend to choose the easy options especially when you are likely to be out office in a little over two years so will let the printing presses of QE take the strain.- Recommended by 5 people
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Laverack
Yesterday 06:29 PM
Stagflation was always going to be the outcome of the crash. Just as soaring interest rates will come in several years time. Governments interferred in the banking system causing the pain to last much longer than it should.
Banks should have been forced to fail.- Recommended by 28 people
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GeorgyPorgy
54 minutes ago
Indeed, stagflation has been the result of an absurd mismatch of tight fiscal and loose monetary policy - a policy guaranteed to deliver the worst of both worlds: rising inflation and falling wages/pensions/benefits. It took a special type of incompetence to deliver this.- Recommended by 0 person
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drjonathanwilson
Yesterday 06:27 PM
Roger
We have the wrong sort of GDP - too many coercive transactions and too few voluntary transactions.
Good points on the exchange rate - whilst a country that prints its own currency cannot technically go insolvent, the actual insolvency must inevitably show up in the exchange rate and the purchasing power parity of the currency.
I think that the linkage between the external value of the pound and the bankruptcy of the state needs further comment.
Jonathan- Recommended by 9 people
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Michael Ernest Corby
Yesterday 06:17 PM
Let us remember that inflation is relatively benign compared with the 1970s, when 5% inflation would have been regarded as a triumph.- Recommended by 2 people
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GeorgyPorgy
51 minutes ago
Yes, it rose to 28%, but in those days I remember that increases in the rate of inflation triggered automatic wage rises, so that I (and others like me) were actually no worse off.
You should appeciate that the figure for inflation doesn't really matter - what does matter is if inflation runs ahead of incomes, which is what is presently happening. Paradoxically this will have a deflationary impact as aggregate demand is sucked out of the economy.- Recommended by 0 person
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micicle
Today 04:17 AM
True, but wage demands and wage increases were also much higher in the 1970s.
Assume food, gas and electricity now increasing at 6% pa and wages at 1.8%pa. This means that the cost of basics (food and fuel) is currently rising at least three times faster (300%+) than wages. In percentage terms, a greater difference than in the 1970s.
It is the % difference between the rising cost of "basics" and wages which really hits the household budget for those on low to median incomes. Also remember this effect has been compounded over the last four years of wage restraint.- Recommended by 0 person
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barakbanana
Yesterday 06:00 PM
Cost push inflation (oil is already at an all time high priced in £s) will rip the heart out of the UK economy: it will sap real wages and profit margins, reduce employment and final demand and ultimately drive up both the debt and the deficit.
The choice is between stagflation and depression not growth or recession.- Recommended by 15 people
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twizzle
Today 02:39 AM
Stagflation just kicks the depression down the road. At some point in time, the authorities will be forced to raise interest rates and then....game over.- Recommended by 0 person
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JohnInCambridge
Yesterday 05:58 PM
Judging by my shopping bills, the news has not reached people like Tesco and Boots that inflation is only 2.7%. It seems more like 27% to me.- Recommended by 38 people
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mjg
29 minutes ago
John, your calculation closely mirrors the House of Commons one - MPs expenses went up by 25% (and remember they are now closely monitored!)