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Britain’s inflation problem

I occasionally get sent material about the economy, and fresh data on today’s ugly UK inflation figures must surely set the alarm bills ringing in the City and Bank of England.

UK consumer price inflation – which unlike retail price inflation, does not factor in mortgage interest payments – comes out at 4.4 per cent in February, the highest in 28 months, according to the Daily Telegraph. RPI rose to 5.5 per cent, the highest level since the early 1990s, back in the period when the hapless government of then Prime Minister John Major was in power and trying to fix the system by tying sterling to the-then Deutschemark. How well that worked.

It is going to be harder and harder to ignore the inflation problem. If you compound the effect even over, say, five years, an inflation rate of about 5 per cent will massacre savings, while of course being just marvellous news for borrowers. And I have this sickening feeling that while some policymakers may fret publicly about inflation, some of them are quietly happy to have this huge wealth transfer via inflation persist. The capital structure of the West’s financial system will be further distorted.

Here are the figures as shown by the Office for National Statistics. They don’t make for fun reading.

One of the few MSM journalists in the UK has been onto this subject early and frequently is Fraser Nelson at the Spectator. Here’s his latest. (The comment thread shows how depressingly silly some people are about inflation).

21 comments to Britain’s inflation problem

  • It just goes to show that inflation is what happens when you print money.

  • Chris: Yes, funny that, isn’t it?

  • RW

    I read a comment recently whereby a retired couple calculated inflation on core spending – food, utilities, council tax, insurance, car costs etc – as well in excess of 10%. I haven’t done my own domestic arithmetic yet but can well believe it.

    When cost push inflation at this level hits (very largely) non-discretionary household spending to such a degree, there is clearly a serious problem for a great many people. Whether raising base rates is a solution or a further problem is far from clear. Yes the alarm bells are ringing but what emergency service are they summoning?

    There was an American politician who recently responded to protesters complaining about food inflation by pointing out that, while food was more expensive, iPads were cheaper. This was not well received.

    For a better picture of the economy, the CPI should perhaps be broken into two components – core and non-core. But the BoE in any case has only one tool, the base rate, and has my sympathies. Damned if they do, damned if they don’t

  • Dale Amon

    Funny thing that. The US Government is up to the bald spot on its eagle in regulating food and ‘helping’ farmers… and has very little to do with the production of iPads.

    Gee, I wonder if there is some connection…

  • There was an American politician who recently responded to protesters complaining about food inflation by pointing out that, while food was more expensive, iPads were cheaper. This was not well received.

    That “let them eat cake” moment belongs to New York Fed President William Dudley, who at least technically is not a politician.

  • RW

    Food for thought indeed, Dale.

    Alisa, I really am most dreadfully sorry. My bad.

  • John B

    It is why they print money, chris.
    As I imagine most here know, low interest rates means money is cheap to borrow which results in malinvestments during periods that are seen as “boom” times.
    Unwise investments are unrealistic (like the massive building splurge in Spain), resources are in fact wasted on things that nobody wants very much.
    The only way out is to let interest rates find their own, realistic, level which at the moment would probably be something over 10 per cent, and to just stop tinkering with reality.
    Cursed by Keynes we are, indeed.
    But he was probably more about transferring power to the elites and thus, for his purposes, it would have made sense to devalue the currency (which only plebs would store their wealth in).

  • Dale, while there is some of that for sure, I think that the more obvious explanation is that iPads are not nearly as basic-commodity-intensive. After all, food prices are growing all over the world, not just in the US, and that is happening mostly due to hoarding in an anticipation of both shortages (for both natural and man-made reasons) and of further growing inflation (totally man-made).

  • RW: I just thought I’d give credit where it is due:-|

  • Alsadius

    Whether it massacres savings depends a lot on how you save. If you save in stock, you get paid back in inflated cash flows, so you’re okay. If you save in bonds, it mostly depends what the market’s estimates of inflation were at the time you bought compared to what it actually wound up being. And of course, hard assets will generally inflate along with everything else. Inflation is mostly a tax on holding liquid money, not on “savings” more generally.

  • John B

    Alsadius, okay, all things being relatively sane.
    But if you had held any of the assets you mention above you would have lost fairly heavily over the last few years.
    Everything has gone downhill because of malinvestment caused by cheap credit.

  • Eric

    But he was probably more about transferring power to the elites and thus, for his purposes, it would have made sense to devalue the currency (which only plebs would store their wealth in).

    I wonder if it’s so much the elites or just the elites in government. If the inflation rate is 0% and your investments pay 2% you pay taxes on 2%. If the inflation rate is 10% and your investments return 12%, in theory it’s the same return (or close, anyway). But now you’re paying taxes on 10% of your constant-dollar principal.

  • John B

    The power/wealth is transferred to the printers of money by the fact they are getting wealth by simply making bank notes (or their computer equivalent) to spend. The more bank notes in circulation, the less goods each bank note becomes worth.

    Yes, you would pay tax on your interest whether that interest 12% or 2% of the capital. But the real money they steal is by the above principle.

  • PeterT

    Investing in real assets is all very well in theory, but the great majority of people do not have the time horizon and free assets to make it work. Also, transaction and management fees and costs really hit the small scale investor. It is very hard to do much that is sensible without, say, £20K minimum that you don’t foresee needing anytime soon.

    The social benefits of providing a high quality currency that people can use to save as well as conduct transactions are highly significant. I think it could be a vote winner.

  • Rich Rostrom

    Inflation is deliberate robbery of everyone who holds currency or is a creditor.

    And yet it seems that there is sort of consensus that a “healthy” economy requires 2% inflation!

  • Eric

    Yes, you would pay tax on your interest whether that interest 12% or 2% of the capital. But the real money they steal is by the above principle.

    I disagree. Not very many people hold large amounts of cash, and as the inflation rate rises even fewer will.

  • And yet it seems that there is sort of consensus that a “healthy” economy requires 2% inflation!

    Governments by and large are holders of debt. Since inflation of non-indexed bond allows them to slowly ease their way out of problems of their own making, this is why mild inflation of around 2% is considered by governments to be a good thing and leads to the inflation targets set by the Bank of England.

    Deflation is considered to be anathema to governments and large businesses as they are effectively designed to operate in an inflationary environment.

    However, the reality is that the vast majority, consumers and those with cash, would benefit from mild deflation.

    The recent plague of quantitive easing was designed to keep inflation going as the financing of the government was deemed more important than the needs of the people.

    Quell Surprize!

  • Andrew Duffin

    It’s increasingly – and depressingly – clear that this government, like all governments, wants and encourages inflation.

    They need some way of paying back at least a bit of the public debt, to some extent, and some way of reducing the State’s outgoings – in both cases this has to be done without frightening the horses by making it too obvious.

    What better route is there to these goals other than the continuous and fairly stealthy debasement of the currency?

    So, they print lots of paper money and keep interest rates negative.

    Result – for them!

    Steady normal life for the people who matter – bankers, public-sector union leaders, etc.

    Penury for the prudent, the savers, the pensioners, the provident generally.

    I did say it was depressing, didn’t I?

  • Cousin Dave

    I don’t know about GB, but I am convinced that the U.S. is now experiencing stagflation. The job pool is shrinking, and people who get laid off (e.g., me) are finding that they have to accept lower wages in order to find another job.

    The federal government tries to mask inflation by lumping the present value of residential real estate in with other costs. However, consumers generally do not benefit from declining real estate prices; only those with cash on hand and no commitment to an existing property do. (And even those people aren’t buying because they are convinced, and probably rightly so, that the market has not reached bottom yet.) Mortgage payments do not decrease when the mortgaged property loses value (in fact, they may go up, depending on the terms of the mortgage), and renters do not see decreases in their rents just because the value of the property they are living in goes down.

  • Laird

    I agree with Cousin Dave; in the US we’re in the early stages of stagflation. Unemployment is high and the general economy is moribund; only official reported inflation is still missing from the mix. However, consumer prices* are steadily creeping up, and the rate of increase has recently started to accellerate fairly sharply. QE and QE2 vastly increased the money stock and the only reason inflation hasn’t exploded is that the banks aren’t lending, so all that newly-printed money isn’t sloshing around the system (yet). But it’s there, and people are definitely starting to notice and get nervous about it. Once it all kicks in this is going to be worse than the Carter years. At that time it took a 20% interest rate to kill the inflation. What will this round bring?

    * The Consumer Price Index isn’t really a measure of inflation in the proper sense, but it’s a decent proxy for most people. Unfortunately, the government has been monkeying around with the CPI in recent years, removing various components (such as food!) from the calculus in order to keep the reported number down. (Of course, they claim that there are benign, technical reasons for the changes, but I don’t know any knowledgeable person who actually believes that bilge.) And, of course, even the “doctored” number is now going up, so that game won’t work for much longer.

  • Paul Marks

    All nations (even Switzerland) have fiat currencies.

    But that does not mean that they have to have wild monetary policies.

    This is a CHOICE.

    The authorities, in Britain, the United States and (with all the bailouts) the European Union, have CHOSEN to act as they are – and all the consequences that will follow are the results of their choices.

    The last words of Mr Heston’s character in the first “Planet of the Apes” film spring to mind.