Explanation time for the Bank

Crucially, we will also see whether it is still expecting inflation to be at or below target at the end of the forecast period, on unchanged interest rates.

Stephanie, maybe you could prepare a blog showing some the previous forecasts, so we can have a laugh. Maybe showing their lovely fan-charts, with lines of actual values shown against the predictions.

Wasn't it May 2009, the forecast was for CPI inflation to fall to 0.7pc during the 2Q 2010... but it was 3.5pc

And in August 2010 only a few months ago, it was forecast to be 2.8pc in 2Q 2011, reaching 2.2pc by the end of this year.

Stephanie, methinks a there is strenghening of your theory of Friday last, 'the double interpretation' of unfavourable inflation statistics.

Could be very interesting in the next few weeks, looks to me like a bit of trouble brewing t'mill as our media whip-up the policy arguments; the BoE emerging cautious to cuts approach versus the governments aggression.

As these leviathans of the economic world lock horns, maybe by setting their egos aside we ordinary taxpayers may get lucky, a non-contentious consensus of national policy is agreed and supported by all, including the Labour opposition, that puts the wellbeing of the nation first.

Sorry but when did the BBC decide that CPI is a more accurate measure of inflation than RPI and the latter probably underestimates the the true level of inflation for many of the less well off. It may be the government chooses CPI to be the basis for adjusting pensions annually but that does not mean it is the right measure of inflation as experienced by citizens. CPI is a device to retrospectively devalue the savings (or deferred pay) of millions. The CPI excrement hits the pensioner fan in under six weeks.

1. At 11:42am on 15 Feb 2011, jonearle wrote:
Crucially, we will also see whether it is still expecting inflation to be at or below target at the end of the forecast period, on unchanged interest rates.

Stephanie, maybe you could prepare a blog showing some the previous forecasts, so we can have a laugh
-------------------------------------------------------------------------

I can help with that jon from an article I was reading earlier.

Let us go back to the quarterly inflation report from February 2010 and examine what it forecast for now.
"CPI inflation is likely to remain elevated in the near term, given the restoration of the standard rate of VAT to 17.5% and the continuing adjustment to the past depreciation of sterling, before persistent spare capacity causes it to fall back to below the target. ….. it is more likely than not that inflation will be below the target for much of the forecast period,"
If we look at the accompanying fan chart we can see that the Bank of England expected CPI inflation to be approximately 1% at this time before drifting up to 2% in 2013. This type of forecasting has been a feature of it for some time. Firstly it was/is hopelessly wrong and secondly it always predicts inflation to be on target around the target horizon.https://t.co/Ks8NJYI

However whether we should laugh or cry at this is open to debate...

Stephanie, perhaps you could, from time to time, give us an estimate of how much, in total, UK savers are 'paying' for our current economic predicament (and, of course compare that total with such rewards as bankers' bonuses) after allowing for the effects of inflation.

You can't de value your currency approx 20% and expect no inflation , long gone are the days when we used to make / supply our own steel , gas , oil and most important basic food materials .

With 200,000 plus hitting the dole in the coming months, a wait and see on inflation is the right policy. As long as wage increases are depressed I would leave the status quo...

There's a misunderstanding here: the Bank's policies can only influence money supply, which (both Tories and Bank insist) is the true and long lasting inflation controller .

But money supply is barely keeping pace with output.

The Bank's repo rate is intended to influence the demand for credit and money supply. If credit were expanding (which it is not) that would be truly inflationary.

The Bank's problem is that businesses and households are so spooked by the current and impending cuts - and the government's bombast about 'the state of the economy' - that demand for credit has collapsed, dragging money supply downwards. Putting up interest rates now would be the equivalent of pouring petrol on Britain's fire of declining outputs! It would make the recession even worse.

All of which demonstrates that the BoE's view of the British economy is that the overriding risk of recession has not diminished. The BoE's MPC clearly views that risk as more worrying than any threat that imported inflation. Or that it might take hold of any inflationary expectations.

In short, it appears that the Bank believes there is an HIGH RISK of a severe double dip recession.

Good Morning Ms Flanders, Everyone,

The inflation target is not set in stone...and perhaps not even in statute. ( Not 100 per cent sure ). It could be three or four per cent. The politicians can 'alter' this every so often....on say a five or ten year time-scale.

The inflation rate target can be changed.....to suit a UK which is seeing comparative slippage in the international real living standards tables.

Mr Gradgrind is whispering thus.

The Bank of England has a track record of being wrong 96% of the time in its inflation forecasts of where inflation will actually be in 2 years time - normally to view a convergance to 2% over a 2 year period.

If I was an independent contractor to the governmnent and got my figures wrong all the time I would be dismissed

Independent?

You use abbreviations -- CPI, MPC, CPIY, CPI-CT -- without taking the trouble to say what they stand for.
I feel as though your article is addressed to the cognoscenti and the rest of us can go hang.

(P.S...... GDP and VAT I can manage)

According to the ONS graph of RPI and CPI over the last decade (displayed on the BBC news website), inflation is pretty much where it should be. Inflation has been rising slowly and steadily over that period. Taking away the blip of the recession, it doesn't look like the financial crisis has had any significant effect on the inflation rate which appears to be governed by long term trends.

Don't let that stop some sensationalist reporting though.

Don't panic the expert bankers they have had on the news channels say it is all fine. I mean lets trust them they always get it right.

The RBS spokesman was my favourite, who said words to the effect of "if we ignore Fuel prices, food, transport costs,Public transport, rising taxes, VAT and higher import costs. Inflation is actually dropping in the UK"

Wish I was a genius like him.

The longer this goes on, when we do (if) drop back to 2% it will be 2% of a higher annual base... so we need it below 2% for a period to reset back to where the bank want it to be!

I too like the RBS spokesman comment about if you ignore everything then its all ok. Thats worthy of a bonus on comedy value alone.

Mervyn King is as lost as the government on what is likely to happen to the economy going forward.
The distortions in markets worldwide caused by government and central bank intervention has created an unholy mess. Ben Bernanke's Ponzi scheme aimed at creating the illusion of economic recovery is doomed to fail. Recent earnings forecasts by CISCO and FedEx (two major bellweathers) of economic growth are no source of comfort. The cheap and plentiful money supply provided by the Fed is doing its damage outside US borders, mainly in the emerging markets.
Nobody, including Bernanke or King can be honestly confident about how the global forces are going to play out over the next five years and beyond. The degree and scale of market distortion created by their respective Quantitive Easing (Money printing) exercises from the UK, to Europe and US , together with the unsustainable government debt levels in parts of Europe and the US, coupled with prolonged record low interest rates, have served to distort the behaviour of savers and investors alike worldwide. Of coure, traders love it.
Given such distortions, it seems particularly foolhardy to cling to the idea that one can make predictions about what is going to happen next, whether one is talking about the UK or any other economy in this mess. Groupthink by City economists is never a particularly reliable predictive measure. Most of these 'professionals' rely upon similar (if not the same) data sources and rarely seem able to think outside the box, with a few exceptions. Their inability to handle the unexpected is infamous. Given the degree of distortions in markets worldwide, coupled with the fact that the modern-day geopolitical and economic distribution of wealth is very different to the 1980s even, should cause pause for thought before drawing too strongly on past historical recoveries.
For King to believe that he can neatly package external factors away in the corner and somehow ring-fence the UK economy in terms of inflationary issues, suggests the poor chap has truly lost the plot. But then he is not alone in this regard.

The BoE are playing with fire here - it may be that they have no option and that above target inflation is the lesser evil compared with raising base rates.

BUT they are fast running out of room for manoeuvre - wage demands may remain subdued this year but not in 2012 when people fully realise their fall in living standards - never mind this year being difficult watch out for 2012....

Funny economy, funny money, funny interest rates.... so why aren't we laughing?

If you are not confused then you don't know what is going on.

I get a distinct feeling that the Bank has moved on from the position specified in Mr. Brown's tripartite system of regulation that created the regulatory atmoshpere that contributed to the banking crash. The trouble is they don' t seem to have told anyone so this is very unsettling.

It would seem that we are being left with a choice of inflation with a little growth and less inflation with no growth. Facing such a policy one has to ask what is meant by growth?

Perhaps, if we had real money and a real economy we could have growth without inflation. One would rather that economic policy was targeted at such an objective rather than just hoping something will turn up.

Q: How do you repay a national debt of 1 trillion pounds without the money to do so?
A: Inflate the debt away.

Going to be a very painful few years for the vast majority of us.

In January 2009 The Bank of England reduced interest rates to 1.5%, and finally to 0.5% in March 2009 (the lowest rate since the BOE was founded in 1694).
In addition to the above the B.O.E. started Quantitative Easing in early 2009.

Since these actions were taken, the following has occurred:
(All figures noted below are sourced from the Office for National Statistics website):

Retail price index (all items) RP02:
Jan 2009 210.1
Jan 2011 229.0
Price inflation = + 9%

Average weekly earnings private sector (not seasonally adjusted):
Jan 2009 Average weekly earnings = £445
Nov 2010 Average weekly earnings = £433 (provisional)
Increase = – 2.7%

Average weekly earnings public sector (not seasonally adjusted):
Jan 2009 Average weekly earnings = £441
Nov 2010 Average weekly earnings = £467 (provisional)
Increase = + 5.9%

Average weekly earnings whole economy (not seasonally adjusted):
Jan 2009 Average weekly earnings = £444
Nov 2010 Average weekly earnings = £441 (provisional)
Increase = – 0.007%

Mervyn King knows exactly what he’s doing, and exactly why he’s doing it.

Writing farcical letters is wholly unnecessary, all that’s needed is the truth. The bank bailout is continuing and the price is evidenced above.

There is an unspoken matter in this analysis. On Jan 1st 2010, VAT went from 15% nto 17.5%. On Jan 1st 2011, VAT rose from 17.5% to 20%. If we compare the inflation rates in 2011 with those of 2010, we should find that the inflation rates are very similar because the same thing has happened in both years. So whatever is causing the inflation rate to soar, it is NOT the VAT increase. We can expect a fall in the rate next year as the VAT rise will drop out of the calculation and then back to normal in 2013.

However, what we have now is a soaring inflation rate which is due to non VAT factors. It reminds me of the mid 60s. Steady Eddie keeps singing the same tune and despite his excellent academic record, he has a track record for misreading the economy. I fear he is doing the same now.

The sad thing is that the longer it is before someone on the MPC takes him behind the bike shed to explain his shortcomings to him, the higher interest rates will have to go. Do you remember 15% mortgages? I do. I'm old enough to have had to pay them.

#7 Leftie

"In short, it appears that the Bank believes there is an HIGH RISK of a severe double dip recession."

You are living in the last decade - the days of GDP growth based on borrowed money and consumption of foreign imports are over as being a useful guide as to whether or not we are 'growing' - rebalancing is what needs to be the focus now - the sooner we ALL wake up to that fact the better.

Hi Stephanie,
I was a little concerned when you said on Radio 4 this morning that the Bank of England could do nothing to stop commodity prices rising.
The BOE has effectively devalued the pound using a combination of quantitive easing and low interest rates.
If they raise interest rates the pound will - probably - rise and commodity prices drop (and the cost of exports will rise).
Quite basic really.

@6 hugz

"With 200,000 plus hitting the dole in the coming months, a wait and see on inflation is the right policy. As long as wage increases are depressed I would leave the status quo..."

Good luck with that big IF - wages demands are going to start filtering through if not this year then definitely next

I predict that CPI will be at, or below, 3% by June 2011.

The reason for this is that incomes are not keeping track with price increases, so demand will drop sharply in the first half of this year - perhaps back into recession.

This drop in demand will cause companies to do a combination of:

-drop their prices
-loose market share
-go bust

@12. At 12:25pm on 15 Feb 2011, Luke wrote:
Don't panic the expert bankers they have had on the news channels say it is all fine. I mean lets trust them they always get it right.

The RBS spokesman was my favourite, who said words to the effect of "if we ignore Fuel prices, food, transport costs,Public transport, rising taxes, VAT and higher import costs. Inflation is actually dropping in the UK"

---------------------------------------------------------------

Excellent news. But he forgot to mention snow!?!

I don't see how taking more money out of our hands by increasing interest rates is the answer to current inflation levels.

Current high inflation is largely increasing due to rising fuel prices and not due to adverse demand in the market. Almost all food and goods deliveries are made by HGVs and vans. These run on fuel and increasing prices as passed onto the consumer.

We have weak growth and reducing spending power is the last thing we need right now.

Stephanie

Having just read your blog and just heard the profit results from Barclays Bank, I am more livid than usual about the transfer of wealth from the savers / pensioners to the government and big banks. (and their well paid staff)

Of course it is just a clever plot to devalue the debt that the goverment has run up and now cannot pay back, and to recapitalise the bankers, because their have been ignorant of the risks they took.

By allowing them to borrow at 0.5% and charge us anywhere from 7.0% to 29% interest on our loans , while paying savers 0.1% to maybe 2.5% (net of taxes. Savers have been going backwards big time for the last 2 years. The banks have been making easy money , any other industry gets a raw deal in comparison.

I think the savers would be better off lobbying the Chinese government to put up their interest rates rather than talking to our policymakers who obvoiusly are not interested in a sizable chunk of the UK population's point of view. There maybe be more concensus regarding solid monetary long term values there!

Since 1694, the credit system has regressively become the property of the private banking system.
Now 97% of our means of exchange is created by borrowing.
Therefore, the real rate of inflation must be linked to the cost of credit.
So although the base rate is 0.5%, what rate can you, councils and businesses borrow money at?
5%? 15%? 25%?
The monetarists are right when they say that inflation is a measure of the money supply.
When you try to factor in the effect on money supply of the Fractional Reserve System which allows private banks to lend out ten times their holdings, the rate goes way up to double figures.
We know that from our experience.
The rate of inflation is much higher than CPI or RPI.
The only solution is for the lenders of last resort to own the credit supply system. And benefit from it.
Let the private banks lend out money that they actually have.

At 12:25pm on 15 Feb 2011, Luke wrote:

The RBS spokesman was my favourite, who said words to the effect of "if we ignore Fuel prices, food, transport costs,Public transport, rising taxes, VAT and higher import costs. Inflation is actually dropping in the UK"

This attitude raises Two points

The boyo from RBS probably can ignore Fuel prices, food, transport costs,Public transport, rising taxes, VAT and higher import costs as it will be taken care of by the 'old bonus' for the rest of us on a pay freeze or just lucky to still be in a job we can't afford to be so blase

2ndly It confirms my suspicion that the rate of inflation is based solely on the rise in the price of a bar of Cadbury's...but don't worry even they have resorted to reducing the size whilst maintaining the price

Funnily enough this is a tactic 'HM Gov PLC' has used with the inflation figures for years... if it looks too high change the way you assess it

The bank needs to understand how capitalism works.

This is a good start: https://critiqueofcrisistheory.wordpress.com/

Let's face it the BoE can't explain because it does not understand. CPI or even RPI have little true reflection upon the inflation rate that households in the UK are facing.

The RBS spokesman is a classic example of the none understanding that predominates the BoE, The City and indeed the government. Did anyone notice the spokespersons comment from 10? He blames the rise partly on the falling value of the £! Hey? Sure the pound did fall but is now back 10 points above its long term trend against the US$. Just another piece of misinformation (codeword for a lie) given by all of the triumvat.

What is displayed so clearly is that the only thing that matters is regulation of financial services. The BoE is apparently largely irrelevant so perhaps savings can be made by getting rid of it. Interest rates have to be kept as low as possible to stop pushing the property market into collapse. It is a subsidy. Meanwhile savers who hold money have to make up part of that subsidy because subsidy can only be funded by people who hold money. The stats from BoE appear to be guff and the fan charts are hilarious. Anybody can be as right as the BoE, or should that be as wrong. Meanwhile everything is going along like clockwork. And debt rescue on all frontsappears to remain the HMG objective. Its a cultural problem. Perhaps people will realise what is going on when they cannot even spend a penny - if they even have one left - because all the public loos are closed, arh to be a Victorian again.

Stephanie,
I missed the comment on Friday as it came out late...but was pleased to read it after all.

Once again you germinated the seed of an idea I was having, that the real policy has been to avoid deflation during the "good years".

Which in a world of increasing production and lower short-run costs meant devaluation of the currency, either through a credit bubble or directly printing more money.

Coupling that with domestic consumer demand maintained both price levels and the illusion of GDP "growth".

This would be domestic protectionism for the banks, at the expense of the population. (In the 1870's banks foreclosed on savings accounts because the money in them was becoming more valuable!)

I wish I had seen this sooner. I wonder, did you comment during the NeoLab years that the people were getting shafted, and how? Did anybody listen?

Mushroom wondered at the time how we could offshore everything without putting reciprocal trade agreements in place...and thought that the UK would be haemoraging stored wealth as a direct result of weak foreign policy.

~~~~~~~~~~~~~~~~~~
It also occurred to me a few years ago that we were living in an era of "School-fete" economics. Everybody came to the fete (market) with a certain amount of disposable income, and as long as there were enough rides and trinkets of sufficient ephemeral interest, we would leave with no money and nothing of lasting value. Remember when barclaycard points used to get you a travel holdall or a camera? Now you get two-for-one entry to an attraction instead.

The availability of "disposable income" is perhaps what allowed the non-exportable service costs to go up while imported goods costs were going down, allowing the man to say "look at total prices...not a selection" (such as necessities like water, food, fuel, shelter?)

This appears unethical in the extreme...you have commented before on how people in lower income brackets spend more on necessities than luxuries (Is VAT progressive...).

CPI obviously wasn't designed to be relevant to TC Mits. But then we knew that. It has never been clearer to this mushroom that CPI has been a smokescreen for a failing domestic economy.

Thanks for turning the lights up a bit.

Skeptic @ 5

Good idea, Sir.

We appear to be the forgotten victims of this mess, in fact, it our present subsidising of the feckless borrowers that is a significant factor to the banks and governments potential recovery from their exclusively self-inflicted disaster for all, but especially the prudent aged innocent savers of the past decades.

11. At 12:16pm on 15 Feb 2011, TheWalrus999 wrote:
According to the ONS graph of RPI and CPI over the last decade (displayed on the BBC news website), inflation is pretty much where it should be.....Don't let that stop some sensationalist reporting though.

Yeah, right. Do you not remember the final years of Gordon as chancellor explaining how the "debt as 40% of GDP" was still being met, by fiddling the period of time the average was measured. However, in reality we were borrowing at far too high levels at that point in the economic cycle. And at the same time pushing billions more into PFI projects so they were not included. And creating billions more unfunded public sector pensions.

You need to look deeper. Have you seen the doubling of cotton prices come through in the CPI yet? No. The rising commodity prices have not fed through much yet, partly due to the way long term contracts are used to smooth peaks/troughs. The raised commodity prices are not going to be blips, unless you think Chinese growth will come to a grinding halt.

@21. At 1:01pm on 15 Feb 2011, clientscope wrote:
Hi Stephanie,
I was a little concerned when you said on Radio 4 this morning that the Bank of England could do nothing to stop commodity prices rising.
The BOE has effectively devalued the pound using a combination of quantitive easing and low interest rates.
If they raise interest rates the pound will - probably - rise and commodity prices drop (and the cost of exports will rise).
Quite basic really.

------------------------------------------------

That might be the expected outcome under 'normal' circumstances. However, I'm no longer convinced that small 'affordable' (or perhaps unaffordable) base rate increases would have this effect. Inflation is, in my opinion and also others, out of control in China and India and some of their primary input suppliers. So, we have not just inflation but rising input costs, upward pressure on labour costs, tightening credit and rising OCRs. Under those circumstances I'm not sure that raising BoE base rates by 0.25% or 0.5% would have any lasting substantial effect on GBP.

4 DorsetJane,
"I can help with that jon from an article I was reading earlier.

Let us go back to the quarterly inflation report from February 2010 and examine what it forecast for now."

Sorry Jane, but you cannot expect the BoE to not only, predict which party was about to get into government (and therefore which fiscal policies would be in place), but to predict that they would change their policy and pursue a balanced budget much earlier than they stated in the election.

Changes to the government's fiscal policy WILL effect the their CPI forecasts.

Bank of englands CPI predictions can be found below...

https://www.bankofengland.co.uk/publications/inflationreport/irfanch.htm

Its just in the pale adge of the fan, so they must be right! well done Mr King!

These jokers get their huge saleries for sitting in a room once a month and deciding to do absolutly nothing! apart from Mervyn who has to write a letter every month, which i think i could probably do just as well.

19. At 1:00pm on 15 Feb 2011, Henry Quimper wrote:

Do you remember 15% mortgages? I do. I'm old enough to have had to pay them.

yes Henry me too but did we not have tax relief on mortgages at that time ???

I am not clever enough to work out what the difference is in real money terms but its like trying to compare chalk and cheese just stating headline rate.All i do know is that thankfully i have no mortgage and the amount i used to pay it off was a lot less of my disposable income than the people are paying today.

Personally i have given up listing to the bank of england / government forecasts as they have proven to be unreliable and always slanted towards whatever target they are spouting, when they miss they have ready made answers in that it was circumstances beyond our control, this being the case there would seem little point in them using inflation as a measure for any calculations, the manufactured low figure they continue to spout has nothing to do with reality its only there to keep wage demands down, what is needed is a totally independent measure of what is happening to real people with much much higher weighting given to everyday items food, energy etc these are what are going up at far higher than the 4% quoted and its these that are killing people not blu ray disc players or 3d televisions.

The problem here is that this inflation is being driven up by tax rises, which only have a temporary effect on inflation, but more importantly by increases in global food and commodity prices. I can't see how the MPC raising interest rates to squeeze the money supply can have any effect on global food and commodity prices. It may strengthen the pound somewhat, which would help a little, but it's effect is very limited.

I also wish they would stop confusing the issue with RPI, CPI etc. The CPI bears little or no relation to the increase in prices felt by the average person. We should stick with the RPI as the only true measure of inflation. In the mid-2000's RPI was 3.5-4.5% which was by far a more accurate reflection of the price increases felt than the CPI which was much lower. If we had maintained RPI under 2% then maybe we could have avoided the housing boom and bust.

Raising the base rate will not reduce the rate of inflation this time around,most of the increased prices are due demand elsewhere in the world,so even if we spend less because of interest rates, the prices of many items will continue to rise in the U.K, it also does not seem likely that they will stop rising and drop out of the equation anytime soon.

All these figure manipulating people trying to tell us that inflation is only temporary makes my blood boil.

How can a country that imports most of its raw materials used by companies producing for export not see a rise in prices when these raw materials are now costing 30% more after sterling depreciation?

Companies have had the short term advantage already and used up stocks bought before devaluation but will now have to pay ever rising prices. They can hardly be expected to be able to absorb even some of increases for ever. Still a long way to go there before the full impact of devaluation is felt.

Inflation is becoming engrained and is not a temporary thing at all as it is spreading worldwide.

Those computer models must be fighting each other at the moment for again the permutations are vast.

Earnings from abroad are great when converted back into Sterling but are these really great enough to gamble on increasing inflation at home?

Most of us surely have fixed mortgages now for long periods so will it be such a catastrophe to raise interest rates strengthen Sterling and beat back those ever increasing import costs?



This is

Considering the pound's fall against all other currencies, and the fact that British imports are always bigger than exports, don't you think it's normal to have a short term increase in inflation?
Once the decline of the pound is absorbed, inflation will go back to normal.

@18 Dempster

"Mervyn King knows exactly what he’s doing, and exactly why he’s doing it.

Writing farcical letters is wholly unnecessary, all that’s needed is the truth. The bank bailout is continuing and the price is evidenced above."

If people find out the truth then we will be in an Egypt situation for now the BoE are getting away with fooling all (almost all) of the people for now, but as the saying goes....

"26. At 1:12pm on 15 Feb 2011, PaulattheRocks wrote:
Stephanie

Having just read your blog and just heard the profit results from Barclays Bank, I am more livid than usual about the transfer of wealth from the savers / pensioners to the government and big banks. (and their well paid staff)"

Word to the wise - holding your wealth in Sterling is like trying to hold water in a collander - it just all leaks away..... Try a (golden) bucket instead

As somebody who runs a SME manufacturing company in the UK I can state that none of the price increases that we are being forced to pass on to our customers and eventually the general public would be influenced in any way by an increase in interest rates. The biggest influence on our raw material prices are the world markets and the fact that due to a lower cost base companies in the far east can afford to pay more thus driving the price of the same goods in Europe up. All an interest hike would do is cut the amount of investment made by UK based companies in the UK, a very bad idea at this time.

I seriously doubt that todays Barclays report of increased staffing cost rises of 20% average including substantial rises of 40% & 50% for its top employees will act as a restraint for public pay.

The main view of much of the nation, a correct one in my judgement, is that the banks essentially caused this financial economic damage and yet the masses, including "middle England" are paying the costs, while those responsible, the very people involved in gambling dodgy derivatives, are still receiving sunbstantial benefits which are factually derived from the chaos and consequential damage to markets, THEY caused.

I personally think that as banks produce their profit & expenditure figures and the masses see the continued disparity and even fruadulent pretence of lower bonuses while renumeration packages have substantially increased, this will act as a red flag to wage and other demands and demonstrations on top of job and services cuts demonstrations.

Hence as a direct reaction to banks financial statements, I can see inflation rising substantially, because I think wage demands will be of a much higher level to re-compense for past 2 years of rising prices and wage restraints, as well as pure fundamental anger at the banking/financial service sector for creating this mess and NOT EXPERIENCING that which has and is continueing to be experienced by so many.

I think that there are already sparks of discontent and the balance of perceived injustice and unfairness is growing in momentum in UK and banks financial reports will be and are basically like oxygen to these sparks which I think/believe will result in need of extinguishing of which the reality will be the use of water cannon.

Mark my words!!!

"So readeth the gospel according to Mervyn King"....good line Stephanie, particularily as Mr King is something like "God" at the moment.
He has the tricky task of balancing a time-bomb on the edge of a razor blade.
If he gets it wrong...lookout.
Does "designer inflation" destroy debt? We all know that high inflation destroys savings.

Have they tried burning josh sticks for forecasts?

The BoE MPC is not able to control inflation for a number of reasons:

1. Without currency movement controls and with banks and companies being able to go abroad for financing, messing around with 0.25% base rate changes is guesture politics, not economics.

2. With interest rates effectively negative, there is no more scope to cut rates - so the only option is upwards - QE is a delusion.

3. Inflation in the UK is not from any domestic source - it's imported - so why do we think prices would fall if we increased interest rates? THe odds are that this would fuel demand for wage increases and drive up prices.

4. Monetary policy does not act in isolation - it interacts with fiscal policy - and with a massively negative stimulus to fiscal policy, if monetary policy was tightened too the UK would go off a cliff.

5. Given the massive refinancing of the banks and the level of monetary creation in the world economy, there is a questionmark over the wholesale capital markets responding to stimuli like UK base rates.

6. Given the demand pull of new consumption of energy, food, etc from China and their rigged exchange rates and mountain of trade surpluses, messing around with UK base rates is entirely pointless.

And suddenly it dawns on me! Maybe it’s just me. Maybe the Big Society is just this one bloke in Bermondsey. Maybe it is up to me to pick up the pieces for the mistakes of the previous government and the disastrous choices of this one, the banker’s bonuses, the bail-out deals, global recession, Thatcher’s privatisation programme, tax cuts, MP expenses, the war we should never have entered. Maybe it is up to this one man to plug the gap that these savage and unwise cuts will leave in front-line services.

Read the full article Already tired of Cameron's BS here:
https://sturdyblog.wordpress.com

Some inflation is caused by rising imported fuel, commodity and food prices. The rest of it is down to excessive debt and the interest payable on it, greedy commercial landlords, and public spending beyond our income. A proper system should have little or no inflation at all, so then Mervyn would not have to go through the monthly farce of writing his letter, and savers and those on low incomes would not be the sacrificial lambs of our debt based money system. I agree with other posters that inflation is very different, and much higher, for those on low incomes who spend a much greater proportion on food, fuel, and tax.

#37

I remeber these charts -where the BOE predicted anything from stagflation to faster growth than China... in other words they didn't know.

What we have now is we are at the top end of the inflation chart and the bottom end of the growth chart...


Well played Merv!

Sorry? explanation time for the bank? .. I don't think so Steph. You and your colleagues can try all you like to detract from the real source.

What I would really like to see is someone to go out any evening over the next few weeks and frequent all the wine bars and clubs in the City of London and then post it on YouTube so the nations commuters and the rest of us striving to pay our mortgages and rents can really see the extent of the inequality.

Is that not a perfectly controversial topic for panorama?

John from Hendon appears to be in absentia today so permit me to oblige and blame it all on the 'fools of Threadneedle Street'.

The RBS spokesman was my favourite, who said words to the effect of "if we ignore Fuel prices, food, transport costs,Public transport, rising taxes, VAT and higher import costs. Inflation is actually dropping in the UK"

I wonder how long it will be before the CPI includes the cost of Locust burgers. Seriously!. Last week I was reading some interesting research into the realistic possibility of our protein requirements switching to easy-to-farm insects as the cost of beef soars (as they require so much grain which requires so much water).

Although 4% inflation is not news when compared to historical figures, I think many of us can sense that we are never going back to the boring normality of consistent low inflation. We are likely to wildly swing from high inflation to depression and dis-inflation.

In a free society the market should set the cost of all resources including money. There is no need for a central bank and it should be abolished, with the treasury being responsible for the issuance of money and regulating the value thereof against tangible assets. Without sound money there is no real valuation of anything and the market cannot function effectively.

The BOE was given its independence to set interest rates, to control inflation, without government interference. Inflation is now the government policy and the BOE are implementing it, despite inflation being the most regressive tax of all.

@ 5

I seem to remember reading somewhere - the "cost" to savers in lost interest over the last 2 years was around £60 billion

Ms Flanders

There is a serious omission in your article.

You fail to mention the extra cost of the BoE's additional stationery. Is this added to the National Debt ?

50 sturdyblog

I have yet to meet anybody who understands what the Big Soc is. Most seem to think it is a way of trying to get something done on the cheap. Perhaps it should be the DIY Society. How this can be the main plank of any strategy beats me.

The Bank of England's medium range forecasts have been wrong again. Oh yes, in January 2010, when we had food price inflation of over 10%, the Bank of England assured us that there was still a serious threat of deflation, and that their interest rate had to be held at nearly zero then. At the time, the media deferred to the Bank of England, the celebrity economists shrugged off the disapproval of their unheralded kin, and the politicians concentrated on the upcoming election. The Bank of England still had everybody's respect, surprisingly, despite their failure to forewarn the 2007/8 banking crisis.

As ever, the Bank of England pretended to have expert knowledge, as they played the game of being on the side of skilled labour. (Perhaps they have to pretend to be skilled labour in the Economics roadshow so as to distance themselves from they whom they call "unskilled" labour.)

So now in February 2011, does it look like there is still a threat of deflation? No. Definitely not in the Food and Non-Alcoholics Section of the CPI. We now have an annual inflation rate of over 6% in Food. Where then is the deflation, Mr Mervyn King, Mr Charles Bean, and Mr Paul Fisher, famous economists all of the Bank of England? Oh, there has been a little bit of deflation in the prices of CDs and DVDs, and we saw HMV ran into trouble recently. OH yes, in the "Leisure and Recreation" sector, we have a bit of deflation. But wait a minute, what use is deflation in that sector? When people's incomes are hard pressed, and food prices have been going up, obviously they have to cut down on the MOST non-essential items. Are we supposed to be eating CDs and DVDs? Have CDs and DVDs been made one of our new FIVE-A-DAY food groups essential to delay our care by the NHS? The inclusion of the Leisure and Recreation segment, or the Hotels and Restaurants segment, in the CPI Rate of Inflation, is no use to those on whom financial hardship bears (including the middle class, but not the class of people who earn £300,000 per annum as does Mervyn King).

So Mervyn King and his Bank of England Economics cronies have barely begun to sweat. Instead of turning the heat up on them, why don't we cut back on the Bank of England's budget, so that they waste less of our money on their heating bill? Why don't we cut back on the staffing levels at the Bank of England, and make their payroll more productive and efficient. Too many cooks spoil the broth, and even the chefs are spoiling the broth because they're too fat to taste their own cooking.

Stephanie
You highlight the long term averaging of inflation rates and point to the average since 1997 being "in line" with target. You say "They(the BofE) have not so far allowed changes in the global terms of trade to permanently affect the domestic price level." This is an example of where you can get the statistics to say just about anything, but intuitively we know the facts on the ground say exactly the opposite. We know that over the lifetime of the recent Labour government, manufacturing as a share of the economy deteriorated further. We know that energy costs have spiralled, many would say permanently so - that must affect the long term terms of trade for an energy dependent economy such as ours. Easy credit in these years since 1997 has led to employment of many more people in the UK at higher salaries than was arguably sustainable - a key factor of production in services (you can't sell consultancy at UK rates in some territories). There just has to be an adjustment - it promises to be painful. The government, or its' proxy the BofE, is suddenly finding its principal economic lever, interest rates, doesn't apply to temporary global influences, nor when growth is in a stagnant range. Are we to abandon the economic management of the nation to a private sector export led growth strategy, with minimal fiscal intervention? In 2 years time, when we are still scratching around for growth, will we shrug our shoulders to the legion of unemployed graduates and say [after Little Britain]"Markets said nooo".
I would like to see a blog on capital investment activity in the economy that has been oftentime a harbinger of recovery - any chance?

Cannot believe the theme of many of the responses on here.

Lest you have all forgotten or are actually ignorant of the fact let me remind you all.

The BoE are just croupiers, the financial conglomerates and billionaire hedge fund low-lifes are the players and these players have manipulated this paper money that we all have no choice but to use as a unit of exchange.

And what's happening across the pond is not going to help.

Today the US President announced that the official national debt will break $15 trillion in 2011. This EQUALS THE ENTIRE U.S. ECONOMY and is roughly a 200% increase in their national debt in the last 10 years. The white house is projecting a $15.476 trillion dollar deficit by the end of September 2011, which will make fiscal year 2011 the largest jump in their debt in history. After the election that was centred around out of control government spending, Obama chose to completely ignore the will of his people and opt for bond suicide. If there was any doubt that the US will face a bond crisis in the next 5 to 10 years, this is confirmation that we will.

It matters not. We are on the edge now and the global money system has only way to go.

Any chance of getting the German government over?

Westminster has failed this country. We have consistently overspent then devalued /inflated out of debt. We have failed to support manufacturing. We have not invested in infrastructure. When will a government tackle the underlying weaknesses of this economy?

This will prove an interesting opportunity to see what are the government's views on its own policies.

If it chooses to do nothing it is implicitly accepting that recessionary pressures arising from its policies will damp down demand side inflation over the coming months, and that talk of a private sector recovery stepping in to replace state spending is a myth.

If it chooses to raise interest rates that would certainly dampen the supply side issue, however it could also kill stone dead any possibility of economic recovery and unleash a fresh flood of liquidity problems as all that stored-up debt, currently hidden by cheap interest, bubbles back to the surface.

The chickens are coming home to roost for Mr Osborne. This is one he won't be able to blame on the last government.

The country is in freefall, the banks are laughing at us...

Inflate away the debt. Of course that's the plan. We have a worse fiscal position than any of the PIGS and household debt is staggering.

But we also face an additional problem that threatens us all. Our national economy is a full liability partner of the investment banking industry and as such is one bad bank away from sovereign default. We're here because the last and this govt believe that without our large Investment Banking industry the UK economy will fail.

So the question is twofold
1/ what real target wage inflation rate do we need to reduce real household debt by 1/3 over a 6 year period, assuming capital repayments increase at the same rate as wages. The answer is 4 percent pa.
2/ will reducing the crowding out by high public sector wages and conditions be enough to create a private sector that grows quickly to rid us of our dependence on investment banking and achieves this 4 percent pa wage inflation. NO.

There is only one way to do these, a program to build private and public infrastructure. We have a terrible housing shortage, manufacturing zones and the infrastructure and homes to support them are in the wrong locations adding costs that have been forcing manufacturing to locate abroad for decades. We can't afford not to reverse this now.

This policy means a huge fall in house prices causing negative equity for many. But we should still do it because it's tried and proven, and in any event, whether in negative equity or not, the borrower still has to pay off the same debt. The question is, do the population want their wages to be growing or falling relative to the debt.

What is this donut on, inflation is temporary, if inflation was permanently the same it would not be an issue so its complete rubbish.

Inflation is now running away from mervin, he needs to put the brakes on it before we crash out of control. It shows how much banks are paying notice to the low interest rates, savings and mortgage accounts are well above the BOE rate because it is so out of touch, they are becoming a joke.

A small rise would give consumers more confidence and so help the economy, at the moment people see inflation running away, prices getting stupidly high with no pay rises so people have stopped spending. In an economy that relys on people spending were in all sorts of trouble.

Stephanie says:-

"Openly accepting the knavish view - that it is better for the economy, long term, for inflation to overshoot - is a slippery slope."

This view can only be described as "knavish" and a "slippery slope", if the conventional view that inflation is always bad is accepted.

Setting a target for the rate of inflation is an important tool for economic management. Inflation transfers value from those who are trying to store wealth in a form denominated in terms of the currency, to those who have debts similarly denominated, in particular the public debt. It also lowers the value of the incomes of those who have insufficient clout to get increases in line with inflation.

Although the government would not say so, it probably regards both of these effects as desirable. The first, reduces the debt overhang and the second helps to impose the austerity which the coalition seems to regard as the only way to rebalance the economy.

It is not surprising, therefore, that Mervyn's knuckles do not appear to be too seriously damaged.

To all the savers moaning about getting no return on their money:

As you are getting next to nothing, why is your money still in the Banks? Take it out so they can't use it and then they'll have to do something about it.

Temporary is all it takes to rob people of their savings. But then he knows that. If we have inflation of 100% and then 0% he can say 'it was temporary'. However peoples standard of living just halved.

When all that magic money (or QE if you prefer) was made available (printed), did anyone believe that this would not lead to higher inflation? It would devalue the pound making imports more expensive. As we are a net importer of goods this would clearly be reflected in whatever index you prefer to measure inflation.

The BoE clearly considered that this was required to steer us out of recession, and at least one member of the MPC feels that further QE is required as our recovery stalls.

Why, therefore, do people consider that they will now backtrack from one of the inevitable consequences of their previous decisions?

Interest rates may rise slightly over the next few months, but there is unlikely to be a return to interest rates as we knew them for several years to come.

56. At 3:10pm on 15 Feb 2011, Libert_arian wrote:
The BOE was given its independence to set interest rates, to control inflation, without government interference. Inflation is now the government policy and the BOE are implementing it, despite inflation being the most regressive tax of all.


The rising cost of food and energy is nothing to do with the British Govt. The VAT rise is and, from my experience, most retailers have used the VAT rise to push up prices by much more than the 2.1% that relates to the VAT increase. For example 4 cans of not necessarilly the best larger in the world is now £3.49 as opposed to £2.99 at our biggest super. You can see the same in most goods.

Please stop using the neo-liberal mantra that this must be tackled by increasing lending costs and putting more businesses, jobs and peoples' houses on the line. It is daft. Deflation is a bigger threat.

I suppose the way we need to look at it is, if you don't have huge unaffordable mortgage then you will have to pay the price for those who do.

The major cause of inflation that something can actually be done about is the rise in taxation on fuel and that of VAT.

The concept that inflation can be modified by raising base rate is idiotic: how can RAISING the cost of commitments already made be anything other than inflationary?

The argument that it prevents further borrowing may have some merit - although most borrowing isn't optional, it's done because certain things like houses or cars are just too darn expensive to buy out of pocket change. But forcing up the cost of repaying existing loans helps nobody except lenders - the only group of people who never seem to have to draw in their belts however much everyone else struggles.

So if the Bank of England feels that the current rate of inflation is a problem its first act should be to demand a reduction in the overtaxation of fuel (and in particular the ludicrous double taxation brought about by the current practice of calculating VAT on the price of fuel when tax has already been applied to it), and a reconsideration of the increase in VAT. Then if further action is needed, a raise in the cost of taking out new loans... but not in repayments of existing ones.

As the government cannot meet its obligations to its citizens financially - or so it claims - this is the only way to ensure that they are protected as best they can be by finances gone mad.

I find the reassuring noises from the MPC that this inflation is 'temporary' rather disingenuous. Clearly the year-on-year figure is, by definition, temporary and a year later is irrelevant. Prices have however risen and stayed high.

Perhaps it would be better to say that the cost of living is rising rapidly but inflation is low. Then the MPC would be happy - they are keeping 'core' or 'domestic' inflation low.

Just need to convince the unions all is well. Don't take any notice that the Bank is letting inflation rip (sorry cost of living).

Unfortunately the low paid will react differently - once the pay packet runs out earlier in the week they will not be prepared to starve until Friday. So the only hope is more and more credit to live beyond our means. The funny thing is that the credit card companies have not yet realised that the low paid actually have no money - extend their credit and they'll spend it but you won't recover it....
,

I would recommend the government sack the BofE/MPC, and take control of rates again. Set a path to short term increase to 2% base rate, with expectation of 3% by mid/end of next year.

For all those who will be killed by unaffordable mortgages, because they can only survive on a tracker based on the 0.5% rate, then the government could force Northern Rock to run a new mortgage scheme based on equity swap. So the home owner can swop large chunks (maybe most) of equity in exchange for lower repayments - like the shared equity schemes run by housing associations.

The quicker Sterling is worth something, the quicker the economy will be reset on foundations of growth. Who wants to invest in an economy that so devalues itself that it gives it money away almost free to the top 1% of the population while bleeding the standard of living off the rest.

Apart from base-rate trackers, the majority of interest rates (overdrafts, loans, mortgages) are already at levels that would be associated with a more normal base rate. If RBS and LloydsTSB do not play ball and keep these rates at competitive levels serving the nation rather than themselves, they should be nationalised.

What is there left to say about Mervyn King and his MPC! They have got everything wrong. The get it wrong every time. They have almost single handedly destroyed the whole idea of money having a rational price. All because they cannot see further than their banking friends.

The way the Bank of England is being run is a disgrace and an affront to the British people, economics and common sense.

They caused the asset bubble that destroyed our banks by not raising interest rates for the whole of the noughties when anyone with eyes could have seen and did see the express train of the crash coming. They are now continuing to destroy the country. They are deliberately pushing up the costs of all imports by devaluing sterling and this is the cause of the imported inflation. To get rid of inflation they must put up interest rates now as they should have done two year ago (given the lead time)! They must also free the British people from the utter degradation of being the planet's worst debt junkies. They must act not to re-establish personal prudential financial management into the British psyche - if they don't do it now there is only the Weimar or Zimbabwe 'solution' to look forward to and it will be their fault alone.

With reference to #65 and welshwizard5's

..hardly mate, I doubt they will do nothing. Fractional Reserve Banking affords them the 'right' to loan out money they never had in the first place (ie mortgages) and then create money by charging YOU interest on money that does not exist as well as being legally able to steal back your house for not paying back the principal which, yes youv'e guessed it, altogether now... "never existed in the first place".

#54. BJK wrote:

"John from Hendon appears to be in absentia"

Even I have real things to do in the real World! but see #77 and thanks.

What happens when base rates increase by 100% to the lofty heights of 1%? Unfortunately, I believe that Mervyn King has created an impossible situation. Interest rates should have been raised a couple of years ago when everyone was being encouraged (by the previous government) to spend borrow and spend some more.

This is Blair and Brown's true legacy; we have become dependent on cheap money.

From reading the BBC you'd honestly never guess that the quantitive easing, 0% (YES ZERO PERCENT) interest rates and huge expansion of the money supply over the last few years by Mervin King (and the huge deficits being run by our government) had any cause and effect relationship with CPI inflation.

You'd also never guess that we are in a period of extended depression which will see ever rising inflation as the BoE and the govt print and print while the rest of us pick up the tab.

These articles are laughably bad reporting at best... Outright propaganda at worst...

Dear Stephanie, I do not dispute what you wrote. Though, I am concerned that you and many others take it for granted that the culprit is the low interest rate set by the BoE. That is implicit in your article. That leaves me worried because monetarists tend to forget the nasty effects of high interest rates in families, businesses and society in general. We know of a weak pound, high oil prices, increase on tax and petrol duties. No one refers to the fact that interest rates can be effective to lower inflation in times when credit dependencies are at their highest, when credit volume granted to the economy is inflated etc. At a time when we face higher taxation already soaking away available income, what is the purpose of interest rate hikes? None. Inflation is not fueled by the price of credit but pushed by other factors, which will not be impacted by a base rate hike. Hiking base rates will ensure a double dip recession and have no effect on curbing inflation!
Mr King is right in saying that we have to wait at present circumstances!

Just when does this gentleman become a LORD! Must be due shortly!!

RE #10, I'm sure you do know what these acronyms are, Retail and Consumer Price Index, but in terms of context, feel free to start here
[Unsuitable/Broken URL removed by Moderator]
The level of knowledge required to make the article a read, rather than a study, is however rather high, and this is a feature of the reporting in general from the BBC with regards to finance and business reporting, although other areas seem to be much more addressed to the non-practitioner, for example the technology articles are almost always everyman articles rather than requiring the "inside" knowledge that a lot of the finance articles assume you already have. Remember BBC that you are for all of the public, and that specialist reporting channels exist to fulfill this need.

It is me or do statements like “the fall in value of the pound” stated as an outside inflationary pressure by the BOE… when compared to what, the US dollar?

“The UK can set its own inflation rate?”… well then they must be bringing out a new measure of measuring inflation called MIR (you can guess what that stands for), this will measure the following items brought from Lidly’s/Tesco’s: -

Tin of backed beans
One razor blade
One Turnip (very apt)
One box tissues (for crying into)
One pair of reading glasses (that show only a blur)
A pen that writes in invisible ink until you heat the paper

And at the other end of the spectrum.

The Bank interest rate
Average bar bill at the Guards Club and Whites (men only)
Ongoing cost of being a Mason
Average wage of a workman/tradesperson/cleaner/cab driver

Taking everything into account does anyone know the current rate of inflation… answer = no.

Who controls the UK economy, the BOE, the government, who?

What input into this does the average citizens have, answer = none except once in (5?) years maybe?

Is it not crystal clear that the BOE have only one thing going for them… they are consistently wrong? This is great news for those that have the ability to bet against their procrastinations, but for the rest of us it’s going to be a nightmare, bring back Cromwell.

The usual pro-inflation spin

Well the inflation discussuion with Ms Flanders has now gone on for months (is it approaching ayear?) and whilst the professional inflation deniers have not yet been silenced at least there is a little bit more momentum realising that one cannot just keep subtracting out those bits from the data that one wishes to.

As with other comments here, I still worry that we can sack our MPs but not our MPC, aserious democratic deficit (- oh that deficit word). Anyway given that the electorate are powerless in the face of the MPC our discussions here are probably futile.

Nevertheless I will state my newish concerm Since the base rate rise has been left too late, there is the chance that this has signalled the economy is too weak to stand such a rise, and so even when the rate does go up there may not be a rush to buy pounds and so that 20-30% currency effect will remain. The longer the MPC waits to raise, the stronger the chances for it to do more harm than good ... it may already be too late rather than too early.

Rising commodity prices are simply because of a shortage of demand relative to supply and isn't a fundamental inflationary process in itself simply a temporary one on price levels that will fall back;this from Hyperinflation hyperventilator Richard Russell;

https://pragcap.com/richard-russell-hyperinflation-what-hyperinflation

"The precious metals are hesitating, the CRB Commodity Index is in a bullish trend but is now hesitating, XLE, the widely-followed energy exchange traded fund has been in a bullish trend but is now moving sideways, oil has been declining, and March oil is now selling below 86.

And what’s most important (nobody seems to be noticing this) is that Chinese stocks are most definitely in a down-trend. China has been the monster buyer of commodities, and if China is slowing down, that will put a big question market in the hyper-inflation scenario."

"One other item — if we’re heading for hyper-inflation Treasury bonds should be falling out of bed. Not so, below is a daily chart of the 30-year US Treasury bond, and it’s hardly falling out of bed. If there’s inflation coming and certainly hyper-inflation, the bond market will smell it. From the looks of this chart, I’d have to bet deflation over inflation.

When ever I hear a consensus view of what lies ahead, I always check with the market. If the market doesn’t agree, I remain sceptical. As for the current hyper-inflation forecast, I’ll remain sceptical as long as the market is sceptical."

People are crazy if the think raising interest rates will do a great deal to tackle imported inflation.

A rise to 2% would only add a few cents to the value of the pound against the Euro/Dollar, it will not make the pound strong enough to sufficiently reduce the cost of imports anyone who thinks it will is deluded. Food and Fuel costs will continue to rise as long as market speculation exists, petrol will never be cheap again.

All rising interest rates now will do is make the rich (those with vast amounts of savings) richer. People close to defaulting on their mortgage will default and the whole financial system will come crashing down again. This time there is no-one stupid enough to bail them out.

This whole excersise has been a waste of time and money. The banks should have been allowed to fail because they had a bad business model. Paying bonuses for faliure is destined to fail, if my compnay made billions of pounds in losses I would be made redundant not given a bonus!

This country needs to scrap the City and all it stands for, with the pompus fools with flash cars and an expensive over inflated 'flat' in London. We need to turn toward a new sustainable green high tech economy based on hard work not pipe dreams and speculation.

If we raise rates we will not be able to stop rasing as the Inflation will still be there. Our failing enconomy would still be weak with a 15% interest rate. There would not be any banks left if we reach that rate which is possible if we jump every time inflation rises. The World is changing there is a realignment of power and living standards from the West to the East, we need to deal with it.

If the next quarter has negative growth again we will be officially in a recession again, and with inflation at 4% and climbing, I wonder if we will officially be in stagflation at that point?

There are two competing drivers on interest rate policy at the moment.

There are the needs of the real economy. Even with BoE base rates at 0.5% the real economy is contracting with negative growth and increasing unemployment. This is set to deteriorate further when the VAT rise and government cuts feed through.

Businesses and households are starving through lack of afforable credit. This is chocking off demand, causing bankrupcies and sliding us into an asset depreciating depression. If we are not careful the expectation of falling asset prices will become self fullfiling and then we are in a meltdown scenario. People wont buy anything as if they wait they know they cvan get it cheaper. This causes more bankrupcies, which in turn causes faster asset value deprecaition.

Then we have the needs of investment banks. They want to maintain high margins on their lending. Borrow from the BoE (okay LIBOR linked) at 0.5% through either QE or base rate and lend to the real economy at much much less affordable levels. That's if they dont use the money to speculate on commodities, driving inflation up.

The banks must also be directly resposnsible for the inflation as they create, through fractional reserve banking 97% of the "money" in circulation. If we want lower inflation all we need to do is get the banks to increase their capital reserves to much higher levels and reduce leverage.

Other policies that would help would include forcing the state owned banks to lend to businesses at much more reasonable rates. if for exampel, the governemtn tookt he decision that it wasnt going to sell RBS but was instad going to maintain it as a state run bank the real economy would have a guarantee of affordable reasonable credit. A ban on naked shorting would help. A Tobin transaction tax would help. Outlawing of tax secrecy and evasion/avoidance would help.

The Government is caught in a dilema. Does it move policy levers to address the needs of the banksters desire to continue making obscene profits that are then given away as telphone number bonuses and salary hikes to such a small group of peopel the moeny is effectiely taken out of circulation?

Or does the Government want to address the needs of the other 99.9% of its constituents? This would include forcing the banks to pay back the money they owe for causing the Great Recession and the costs of the bailouts immediately rather than giving it away as million pound bonsues to its staff?

As the public dont fund the current Government but the bansksters do, I'll leave it up to you to see who gets looked after!

Perhaps I could have a go at drafting the letter;

Dear George.

As has become customary over recent months, I am writing to explain why inflation is above the Governments target.

Frankly, at 2% the inflation target is far too ambitious, a legacy from the previous incompetent Government that is now inappropriate for the changed circumstances since the global economic meltdown of 2008.

Inflation at 2% is a thoroughly unrealistic expectation these days. The adverse publicity caused by my having to write these letters every month, giving the media some big headlines and filling 24 hours of rolling news from what are still only some very small numbers, just doesn't help to build or sustain confidence in the economy.

By sticking at 2%, we are shooting ourselves in one foot whilst scoring an own goal with the other one...

The policy should be "Don't Panic!". My advice is that we should promote the idea that inflation is not too much of a problem until it reaches double figures, but we should clearly be doing something to stop that happening when it reaches 5%.

Perhaps you would consider raising the inflation target to 5% at your earliest convenience, on Budget day perhaps.

Yours ever

Merv.

#79 John_from_Hendon

John,

Can we really beassured that it is you? :)

Most of the current high inflation has come about from external factors, as many people on here have correctly stated. Putting up rates will have little effect of inflation. When we talk about savers, then you really have to a large sum of money in the bank for interest rates to actually have an impact, and even if rates do go up do people honestly think the banks will match them for savings. I see it like this: most people with large savings in the bank are either wealthy or retired (that is, out of the working economy) and if you are relying on your savings as your means of income, then I would have to question your financial judgement. If you want to tackle some factors of todays inflation, that we can change, then cut fuel duty and reverse the VAT increase for starters. If rates do go up by quite a bit then it's looking like a massive surge in house repossessions, with some banks loosing huge amounts of money as a result, then your heading back to square one. I would also personally prefer to pay a bit more every week on essestianls, and skip on some small luxuries, than have rates rise hitting the compnay I work for, and thus more heading to the dole queue. If the housing market crumbles then HMS Great Britain will finally sink to the bottom of the ocean.

Don't worry people, as you can see from Mr King's comments, everything will be fine once the recovery really kicks in.

Now as soon as we can work out how to make the recovery kick in we're all fine and dandy.

The only problem is that global financial meltdown is inevitable, and barring a miracle, any notion of a recovery actually happening is frankly ridiculous.

Still, if we go for mindless optimism, and have some faith in the financial service industries that ruined us, and haven't been challenged to change at all in real terms, and clearly have no intention of doing so; Then all will be fine.....

... or our oil-based-economy will of course fall flat on its face, and this time it will fall so hard there will be no getting up.

Of course, we could just examine the possibility of alternatives to monetarism?

I'm seriously wanting some action now. I can't wait for the 26th of March. I think I'm going to have a banner saying "leftie pr*ck from pestons picks!" but more seriously I stand bemused at the level of apologizing for the banks today. If you can't read history and see that all the banks have done over the past 2 millennia is slowly but surely skim capital off ordinary citizens. and The one reason they have had it so rosy over these 2000 years is because some sycophants will brown nose so money and power. sadly these sycophants are called politicians. there is no middle class. there is only the elite (money men) and us. When people realise that, through commodity inflation and energy scarcity, then the banker bashing will really begin.

But please don't believe what I say. I once heard it said that 99% off what people tell you is wrong. With this in mind I chose to educate myself. Some of you on here should do a little study into the history of banking. Also ponzi schemes would help for background.

So, what could be driving this inflation. First of all the UK is heavily dependent on imports for fuel, food etc. World commodity prices are increasing for 2 reasons, supply and demand, and speculation. The worlds population is increasing at a rate of 70m per year, oil production from easily accessible crude sources is past its peak (2006, IEA figures), more expensive forms of production are coming on line but the price is only going to go up. 70m extra mouths to feed per year, thats more than the population of the UK added every year. On top of this we have not only the QE money from the USA and UK looking for a home, but also the fact that banks can borrow at near zero to speculate in commodities and drive the price up. The commodity price spikes and subsequent inflation are caused partly by Western Governments low interest rate policies.

Wrong blog. Sorry. Discussions on here are a lot more balanced. Still the point remains.

There are those who say that our current economic woes are due to the world-wide banking crisis. Why then are they not shared to the same extent by our major European partners? They too have very large banks, such as Deutsche Bank or BNP. They too have to cope with the rise in commodity prices.

Why did their banks not get into quite as much trouble? It is interesting to note that in Germany and France mortgage lending throughout the noughties was substantially more restricted than in the UK, both as a multiple of earnings and as a percentage of capital required. This must have significantly restrained house price inflation, which in the UK gave so many people an impression of wealth thereby fuelling further borrowing. Would a lesson not be, to avoid a future credit boom, that mortgage lending in the UK should be similarly regulated?

Another factor may well be the single currency. The countries using it have to fight for competitiveness without the easy option of devaluation and printing money. An immediate benefit is that they avoid excessive inflation. The Greek and Irish crises seemed to have been absorbed and our major partners' debt levels remain well below that of the UK. Is not another lesson that the British should revisit their aversion to the Euro? Or must we forever trust Harold Wilson’s assurance in 1967 that currency depreciation “does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued”?

Sod the inflation rate. Imagine this:

Breaking News! ITER Tokamak 2 fully functional and producing 10GW in pilot reactor. Petrochemical and fission nuclear energy declared obsolete overnight.

https://www.iter.org/mach

Welcome to the future.