The MPC: a case of asymmetry?

CPI is inflation for the rich (and politicians). RPI is a better indicator for most of us.
We also need an essentials index just covering shelter, energy (heating and cooking) and food. This would be the best inflation indicator for the poor and almost poor.

Sf wrote; "What those figures tell you is that the cumulative overshoots in CPI inflation in this later period have actually been smaller than the undershoots that occurred before 2005. They also tell you that, if the Bank does have a secret, higher, inflation target, they've not been very good at delivering it."

Stephanie, might it be the case that this long term view is irrelevant because the existence of any unspoken remit has changed in the recent past? Ie even if, until recently, there was no "secret, higher, inflation target" that doesn't mean there isn't one now...

Good Blog, Stephanie. No-one can complain about anodyne journalism on this one.

How about a follow up where you ask the BoE people and former and current MPC members whether the remit parameters were wrong from the outset and then adjusted in the wrong direction by Gordon Brown?

re #1

I have been advocating that for some time. We also need to reset the parameters for the MPC.

Prices must be brought down now otherwise the Coalition will go the way of all flesh and, possibly, in less than four and a half years.

Stephanie,
There is one key factor that you have not considered: fuel duties and additional fuel duties - the FDE.

This has had an effect on incoming goods (removing a lot of the cheapness) but also in inflating employment costs and, more importantly, other taxes. Both NI and Council Tax have had to be increased to counter the effects of fuel duties and the increases therein.

"a couple of upward lurches in goods price inflation, which have not been offset by falling inflation elsewhere"

- why does rising inflation in a certain area have to be offset in anopther area?

China has increased its inflation target to 4%. Britain is being much more secretive and is just tolerating above-target inflation - making speeches rather than adjusting the bank rate.

You can fool some of the people some of the time but, quite soon, we will see pressure for higher wages. Once it comes, it is too late and that will push up inflation even more. Why should unions show restraint when the MPC is (clearly) not trying to hold down inflation?

@1. At 5:22pm on 11 Feb 2011, Kit Green wrote:

Yes I'm also for the RPI measure rather than CPI for the same reasons.

On a more general note, ignoring inflation targets seems to be widespread among many central banks at the moment and there will be a price to pay for it i.e. political instability and social unrest. I’m not criticising this stance (although I probably will if basic living costs continue to force people into desperate action), because it seems to me that central bank chiefs are stuck between a rock and a hard place. Their responsibility extends to monetary policy. Nevertheless, I would have liked to see a more effective collective and co-operative approach to the global basis of the forces involved. Maybe it simply hasn’t been possible to get agreement, but I can only wonder why considering the potential consequences of not getting control over the costs of the basics of life e.g. water, land, food, energy.

It is hard to believe that this is real - much less serious analysis.

Consider the myriad ways in which CPI (along with pretty much every other government statistic) is essentially fiddled. You might then conclude that your analysis is based on a fraudulent baseline.

Now consider zero interest rates, QE and much the much vaunted globalisation. What is monetary policy doing? Why it is creating commodity price bubbles - especially food commodity price bubbles.

Now consider, for example, that food comprises about 10.8% of the UK CPI basket and some 47.1% of the Indian CPI basket.

You may conclude that food price inflation is much more deliterious to the "developing world" than for the politically correct advanced economies. Don´t ever enquire as to the morality of seeking to starve vast swathes of the world merely in order to prop up price levels of toy box sized houses. Much better to continue to smear what remains of the working classes as racists.

Is this a theory? Or is this based on what is actually happening in the world right now? I don´t know let´s ask Hosni Mubarak.

You think it will end in Egypt? As long as you maintain zero interest rates and keep printing money you will keep tipping people into absolute desperation. It matters nothing how shiny your kitchen is or how gleaming your degrees are - people keep being pushed over the edge and the intelligensia keep dreaming up increasingly implausible theories which serve as nothing other than wilfull misdirection.

Ask why.

"Oh what a tsngled web we weave when at first we practice to deceive"

'The Bank's view, clearly expressed in a speech given by Charlie Bean in October of 2006'

......................

Bean's view is now largely irrelevent because since then (2006) the UK economy has entered a new high risk dangerous phase with very high debts and deficits and the external inflationery effects compound the position of the UK as being unable to borrow, print money or raise taxes against a backdrop of several trillion quid in national infrastructural and other UK liabilities with 30 + million British people dependent on state handouts of one kind or another.

The UK is bust in all but name and most at the BOE never mind the ordinary person in the street ... do not seem to know what it is that the Bank of England is catually supposed to be doing ... in our name and with our money.

What money is still in the UK is in private hands and is there only to enable the vested interests to 'milk' the essential revenue streams ... food, fuel, banking, energy, transport etc.

I'd like to see wage inflation and YoY change in house prices plotted on the same graph.

Evening Stephanie,
we seem to talk about the MPC and it's failures to meet inflation targets a lot.
What sanctions are there on the BOE for failure? NONE.
USA is busy telling everyone that inflation isn't high enough whereas in UK we are told it will probably drop next year!
We have said on this blog for the past 3 years that current economic policy will lead to hyper-inflation, just like the same measures did under Thatcher (and she was told by her economists that it would).
My domestic inflation is probably around 8% at the moment and accelerating, so what's to be done?
From BOE -nothing they say.
From Government -nothing except spending more money on flawed energy policies which will drive inflation skywards.
Soothing noises from that nice Mr Cameron-"everything will be alright in 2020".
Perhaps the MPC should be disbanded and concentrate on reporting actual inflation instead of pretending that they have some measure of control?
2014 will be the year that all of this pretence will unravel.

Classic neo-liberal catch-22 propaganda.

It's not about un or under employment. It's about inflation and if the inflation is caused by external supply factors then it's about inflation expectations. Workers will demand higher wages therefore that justifies sacking them. As unemployment is a voluntary life choice there is therefore no spare capacity to stem the horrors of rising prices. Austerity is required.

The net result ia a weaker workforce and cheap labour that can serve their masters without daring to complain.

Are people still falling for this claptrap ?

Take your head out of your manifesto and open your mind.

I'd also like to see house price inflation on the graph, which Gordon Brown told the MPC to ignore.

I'm no economist, but I become more and more concerned about the many margins and profit opportunities between production and consumption.

A low sterling level cheapens imports, but does this feed through to retail pricing?

Downward pressure on farm and factory gate prices should be good for consumers, but is that happening at the consumer level?

The answer probably lies in the nerve of the (many) companies in supply chains, who are pushing their margins higher out of nerves as opposed to certainty of future growth.

There is also the issue that whilst some supply chains have shortened - eliminating the number of margins involved - others have lengthened as retailers seek to devolve costs and responsibilities down the chain.

I have to wonder how many companies are making nice profits without actually DOING anything positive towards delivering goods to the general public.

It is difficult to see the MPC as a conspiracy or indeed relevant as the central tool of economic management but the effect of continued low interest rates and the coalition's policies is push down the real wages of workers and increase the margins (and bonuses) of owners and managers. This may work in the short term but soon the 'worm' will turn and off we go on the road of cost push inflation and price lead wage claims. Next winter could be one of discontent for Cleggmeron.

11. At 6:39pm on 11 Feb 2011, Nick wrote:
I'd like to see wage inflation and YoY change in house prices plotted on the same graph.
-------------------------------------------------------------------------
From memory, average wages rose substantially - consistently at or above inflation as RPI/CPId.

That's average wages.

I was horrified to find that a 'bank' was offering less than £12K in 2007. And even more horrified to discover what was on offer to starting graduates: over £100K for a law degree, same year. Two or three years on in career, the lawyer would have been earning £250K. Probably add £50K to £100K to that for 2011. Helps to explain London property prices. The bank clerk is probably out of a job.

https://www.bankofengland.co.uk/publications/other/whatthebankdoes/index.htm

Ha ha ha ... its so funny ... except that we're paying for it ... Ha ha ha ... also notice the bit in the BOE pdf document ...

'The Government’s 2% inflation target
The Bank aims to keep the annual rate of inflation at 2% – the inflation target set by the Government. Some prices will rise by more, others by less. But, on average, the aim is that prices across the economy rise by 2% a year.'

and then in small print ...
'Since 2003, the inflation target has been set in terms of the Consumer Prices Index (CPI).'
.......................
The BOE states that our inflation level is low in comparison to what it used to be ... 13% - 15% etc.
This is all insulting to anyone of reasonably 'average' intelligence ... the 'average' being the bit that the BOE is having difficulty with and then misrepresents itself on its own web-site...

You couldn't make it up!

Oh dear, I hate these arguments that focus on insignificant and unreliable minor movements in unreliable single percentage statistics! What is it about numbers that seduces people to ignore the fact that they are no more than guesses, subject to margins of error that render them almost meaningless? Yet we debate!

I go shopping. I notice that my tipple is a lot dearer this week - and petrol's up. I don't dwell on the symmetry of the issue, or curse the failure of the BOE to warn me in advance. They couldn't if they wanted to - they have no more idea about future inflation than anyone else. Like the rest of us, they know it when it happens. If you doubt that, try and spot consensus about the inflationary effects of QE.

But still we succumb to the lazy convenience of accepting the latest good news/bad news pronouncements of the MPC. Hell, some people even hold their breath in anticipation!

Numbers, percentages, graphs, charts, analysis, opinions - all harmless nonsense promoted by others.

I believe it used to be called 'snake oil'.

SF - "True, they were not targeting the CPI then: the target was RPIX inflation of 2.5%. But when the change was made, the new target of 2% was felt to compensate for the fact that RPIX tended to be higher. In other words, if there were a significant bias, you would expect to see it in the CPI as well as the broader measure"

So when managing for RPIX COI was stable, when managing for CPI it wasn't. I think including the early data in the argument against a bias is dubious - only the CPI years should be included.

Oh yeh, also a side issue to note is when MK took over from EG.

9, 12 and 13 are depressing but salient obsevations.

I have never really understood how the relationship between raising interest rates and lower wage expectations works.

I suspect when neo-liberals talk about keeping inflation down they really mean wage inflation, and as such the BoE is on target.

Looking at where we are right now on the chart it's hard to see why the Base Rate is currently 0.5%

The chart shows inflation was about to get seriously out of control from late 2007 through 2008 - during the time the the financial crisis was building. When the news of the demise of Lehmans broke in mid September 2008 RPI and CPI was close to 5%. The base rate was at 5%. The global crunch caused a massive over-correction - everything, indices and the Base rate, hit the floor with a crash. Two years on and the indices now stand between 3 to 5%.

It shows the BoE is caught between their inflation objectives, stated or unstated, and their unstated desire to help the banks recover from their problems or, as the BoE puts it, aid the economic recovery.

As an aside. Looking at the chart it is interesting to see the track of domestic services. Now most of these are delivered by our self-promoting SME sector. Appears to make a nonesense of their claim regarding their productivity and effectiveness!

Increasing interest rates was supposed to reduce the use of credit, and by doing so reduce demand and therefore inflationary pressure.

The credit crunch, as its name implies, had a dramatic effect on the mechanism for the provision of credit, from which it has not recovered. The contrast between the present reluctance of banks to lend to SMEs, except at high interest rates and their former eagerness to do so, is clear evidence that massive changes have occurred. It is unlikely that credit provision would respond to bank rate rises as it did pre-crunch. The lever formerly used by the MPC is probably broken. Anyway the government is desperate to increase the availability of credit in order to get more growth, and it is clear that whatever else might be causing inflation at the moment, it is not too much private credit.

Are the Governor 1 (with RPIX target) years statistically different to the Governor 2 (with CPI target) years?

Hi to you all, I've been reading this and RP,s blogs for a long while and am always impressed by the depth of knowledge and insight of the people who post comments. I now feel I have gained enough knowledge of my own to confidently reply to some of the posts on these incredibly important issues, to cut through all the hype, misunderstandings and misinformation and to see things for what they really are. I support no political party or subscribe to any particular economic doctrine or school of though - just pride myself on being a 'free thinker'.

On the question of inflation it seems that the main problem is confusing cause and effect. The true definition of inflation should be an increase in the money supply (whichever measure is used - M0, M1, M2, M3, MZM etc) - the inflation we perceive as price inflation ( CPI, RPI ) is an EFFECT, NOT A CAUSE IN ITSELF. Was it Friedman who said 'inflation is always and everywhere a monetary phenomenon'? Price inflation can be low when money supply is increasing - as it was during the first half of the 'noughties' due to the China effect but during that period we had massive asset price inflation in houses, etc. Now we have higher price inflation but deflation or stagnation in house prices and massive inflation in commodities. Basically, focussing solely on price inflation as the MPC does every month is missing the larger pieces of the picture and is misleading (deliberately?) all of us - It can result in the BOE raisng interest rates when they should be lowered and vise versa with serious implications for the long term health of the economy. Quantitive easing (buying your own IOU,s with borrowed money - whose money I am tempted to ask?) is seriously inflating the money supply and must, by definition, make money 'WORTH LESS' which is the same as devaluing money. All this extra 'free' money sloshing around can either be made to do something useful (lent to businesses to invest and increase productivity, etc) or, as is happening at present, contribute to the mother of all commodity price bubbles.

The confusion of 'INFLATION' (money supply inflation = cause) with 'inflation' (CPI/RPI price inflation = effect) is so serious that a new term ought to be invented for one of them.

Whatever reason the BOE has for leaving rates at 0.5% for almost two years, if it is charged with keeping 'inflation' at 2% and has the power to do so then IT SHOULD DO WHATEVER IS WITHIN IT's MEANS TO DO SO - anything else is a gross dereliction of duty and makes it a laughing stock.

Two questions....would raising interest rates eventually choke off demand enough to bring 'inflation' down without bringing the country to its knees and how do you reduce money supply back to a sensible, sustainable level?

'prices of goods tend to be set globally these days', sorry to be cynical but please smell the coffee, the price of goods and services are set by the vendor according to what the buyers in each market can afford.

Compare utilities prices, supplied by an almost monopoly of vendors, accross the EU in relation to wages.

In short, the Bank of England got it wrong over inflation for a long time. They should have ensured higher interest rates to mute the bubble long ago and now refuse to act when inflation is starting to rear its ugly head. No wonder there was an asset boom!

One could easily say that the Bank has been conistent on inflation: consistently wrong!

The most frightening thing of all, as these times pass, is that it becomes apparent that during the bubble many economists seemed to adopt attitudes suggesting they had forgotten the basics whilst producing very convincing arguments to justify such forgetfulness.

The real problems Britain faced in the Nineties and the Noughties, and still faces today, were and are high costs in the production of goods and services. These were mitigated by importing deflation from China whilst at the same time as exporting jobs to China. Now China is exporting inflation.

We have to tackle our costs to make our economy competitive but we will be unable to do that whilst we have an economic strategy based on more borrowing and a social and political refusal to face facts.

I don't think the economists understand what is going on. I can appreciate their confusion but this does not provide us with a workable strategy to ensure any sort of lasting economic recovery. I think the economists need to go and sit at the back of the bus whilst practical policies to defeat unemployment and indebtedness are allowed to hold sway. This will have to mean interest rate rises and government intervention before breakfast, during lunch and after tea.

I do not know if I should laugh or cry for the country. The 'Fools' have shown themselves craven, ignorant and incompetent in equal measures.

The have single handedly destroyed the whole concept of a sensible economic price for money. And because of the destruction of a price for money they have consequently destroyed all other economic levers both fiscal and macroeconomic as these are all mediated through money. Why are any of them still employed?

Stephanie Flanders outlines the case for the prosecution above, so I will not do it again, save to say I was telling them what would happen in writing at the time from the mid 1990's right the way through to the present day - I outlined the extreme risk inherent in taking advantage of Chinese imported deflation with the UK economy, and unfortuantely I was right. Now Stephanie Flanders is also right that senior people at the Bank fully well understood what they were doing - I did not meet as many but I did have contact with several who were fully aware of the risks they were running - and the inevitable consequences. In fact they knew peradventure exactly what would happen - there was bound to be an asset bubble.

The 'Fools' have now dug themselves such a deep chasm that they cannot see a way out of it without a total loss of face on a scale such, as if they were Japanese, would necessitate the certain use of the ceremonial sword. The only have themselves to blame - but we relied on them. It was not some academic game they were playing - they were destroying the country. They have destroyed the country. The only way back is the hard road of asset price deflation. They should be ashamed of themselves - but they appear to be so bereft of integrity that they can continue collecting the fat salaries and pension packages knowing that through their arrogance, incompetence and sheer economic ignorance they are destroying the jobs of million and the hopes of the Nation's people for a generation. All because they ran an unsupportably lax monetary price policy for over a decade and even now they are unable to take the necessary corrective measures.

Further they have destroyed the Bank as a mechanism of monetary control and regulation thereby rendering the Country totally enthral to the international bankers. We have to seize back the Country.

I am pleased Stephanie Flanders is at last recognising the pressure from sane economists to discuss this matter let us hope the David Cameron sacks Mervyn King because if he doesn't rest assured the Bank will destroy the Government. I am concerned however that this Nationally vital topic is being buried behind the Egypt story.

@25 stanblogger.

I'm not convinced the lever is broken. It may be that it's "disconnected" when set to very low levels - say less than 1%.
In any case - we'll see what happens when the rate starts to rise. I guess it will start working again at some point. Or maybe it will not rise to a working level for many years. Doesn't bear thinking about!

The whole thing shows the difficulty of trying to have an impact of a multitude of problems - inflation (in any way its measured!), growth, employment, banking problems - using just one lever, in the hope the government uses its fiscal lever in sympathy.

I agree there have been massive changes. We are in un-charted territory. We can always see where we have been but we seem to have no idea where we are going; or should be going. It's easy to charge anyone with being "inconsistent" when they're lost. Not surprising the MPC hasn't changed the policy for 14 months. When lost it could be safer to stand still.

I can understand why Joe Soap despairs - privately and publicly do we want more debt or less debt; should we spend or save?
Over the last 10 years we proved that spending borrowed money doesn't work. What would Charlie Bean like us to do now?

Isn't the issue the the MPC has little to offer by way of remedies to deal with the inflationary pressures which are largely driven by higher commodity and food prices.

It looks like The Perfect Storm. A storm that's been gathering for many years.

BoE Monetary Policy colliding with the Global Financial Crises.

Is it possible to recover? I'm not sure what the road to recovery will be like. My guess is that it will be very very uncomfortable for many, especially those who thought self-certified mortgages and multiple credit cards would bring happiness (just an example). But no-one is going to find it a pleasant trip.

There is perhaps a little too much detached discussion of inflation targets, definitions, indices, Chinese toys, undershooting and overshooting....the list goes on and on.

The primary purpose of the BoE and the MPC is to establish and maintain STABILITY in the entire monetary system. Controlling inflation is a secondary luxury : at least for now.

And besides, the real reason for current inflation is mainly one of redistribution. (Not wages chasing prices chasing wages.) UK citizens are becoming progressively less well-off. The world turns. The world's cake may also expand but ever larger slices are destined to go elsewhere.

I simply do not believe that the BoE MPC can significantly affect the inflation rate anymore without causing such a violent deflation in the economy that its consequences would be so dire that it is simply a non starter.

The market is broken - effective negative interest rates snd massive QE are the logical outcomes from the credit meltdown and the UK economy has become unsustainable due to its level of imports and trade deficit, so trying to return to "normal" interest rates is now impossible.

It's also the case that there is no longer a link between the BoE Base Rate and the cost of borrowing in the real world.

BoE independence is actually BoE impotence.

Thank you for an interesting post Stephanie. One section I would challenge however and that is this.
"True, they were not targeting the CPI then: the target was RPIX inflation of 2.5%. But when the change was made, the new target of 2% was felt to compensate for the fact that RPIX tended to be higher. In other words, if there were a significant bias, you would expect to see it in the CPI as well as the broader measure"
You may have felt it compensated correctly I am one of those who did not and felt that the target should have been set at either 1.75% or 1.5% as the move represented a relaxation of monetary policy.
Moving onto the current situation I feel this.
"In my view Retail Price Inflation is a better measure and apart from a level of 4.8% being higher in absolute terms it exceeds it old target by 2.3% rather than the 1.7% of the current one. This often gets forgotten in the debate. These figures are being influenced by world commodity price trends which show few signs of abating."https://t.co/ZSf9QZU
One can argue about semantics but in recent times the Bank of England has forecast inflation with a shocking degree of inaccuracy and shown little interest when it overshoots its target.

CPI is a political lie pure and simple.
The BOE remit is to maintain CPI between 1 & 2% across the medium term.
The medium term forecasts for CPI are >5% and yet the BOE do not react.
There in illumination is cast upon the reality that the BOE is independent and that their medium term target. Clearly neither are the case.

In the UK 2000-2003 the average property price doubled.
The property market and the financial transactions that under pins it constitutes about a third of the UK economy. So a third of the economy was inflating at around 30% per year, and this did not impact on the inflation measure. How ridiculous!

Inflation is considered to be an increase in the money supply.
If a third of our economy doubles inside 3 years then there must have been money provided or created to support this. People eventually will have doubled their debts, or utilised the asset difference, inflating the money supply. And yet CPI was between 1 & 2%. What rubbish.

CPI is all about preventing useless politicians having to do battle with an outbreak of inflation by restraining wage rise expectations. A battle politicians throughout history have lost on a regular basis and in which they ignore the actual root cause. This cause was once described to me as 'Give a politician, any politician of any creed of politics a pound and he as sure as eggs is eggs is guaranteed to spend 1 pound 10 pence'.

That is why CPI is a lie because useless politicians are hiding their incompetence.

#27 morkandmindy,

I agree with your definition of inflation, as to your questions,

'Two questions....would raising interest rates eventually choke off demand enough to bring 'inflation' down without bringing the country to its knees and how do you reduce money supply back to a sensible, sustainable level?'

As far as I can tell the money supply has fallen off a cliff, if we measured the price index of everything (rather than just a subset) we would see deflation (dis-inflation).

Some people and companies are paying down debt and others are becoming insolvent, this is destroying the money supply, wage settlements and new lending are depressed so no new money is being created.

Government spending is being slashed with no real reduction in taxation level which is deflationary (reduces the money supply)

They are going to try to pump £190bn of new money into the economy via loans to SMEs which is the last thing you would want to do if it was perceived that inflation was a threat.

It might be possible to raise interest rates by 0.25 to 0.5 % to try to signal to people that inflation is going to be a problem in order to stimulate spending, this might start to drive prices up and sufficient confidence might be injected to get people borrowing and spending again.
Whether that would really happen or whether people would hunker down even more is open to debate.
It would seem to me to be a very risky strategy (it is a bluff after all) and if it started to go wrong (or people found out) the consequences could be dire.

We are definitely living in 'interesting times'

It amazes me that the causes of all these problems (from Fannie Mae, Lehmans, Northern Rock, the BoE Monetary policy and so on and so on) and the perceived solutions (increasing lending to SMEs, and persuading the man-in-the-street to spend more) ---- seem so unrelated.

One wonders what state the UK economy would be in today if the Americans hadn't gone crazy lending money to Joe-six-pack and everyone else to buy property they couldn't afford - then exporting the sub-prime mortgages disguised as solid investments.

Would the BoE chickens have come home to roost in any event? I guess JfH would say they would.

You and your banker friends have been very consistent about driving inflation up, bayling out bubbles and destroying savers. What can I say. Egypt is having its revolution, Britain is in need of one...

Hi markus_uk, you need to find an answer to this one.

How to turn from a net importer to net exporter of the most ephemeral of intellectual goods:

https://www.youtube.com/watch?v=YKzHEPMYxpI

https://www.youtube.com/watch?v=pXf8VdJ1Myw

[Unsuitable/Broken URL removed by Moderator]
* relevance of links is limited, it's just what "got under the hot hand" to revoke a Russian saying.

And here is a detached example of possible developenents:
https://books.google.co.uk/books?id=R-7TaridBX0C&pg=PA436&lpg=PA436&dq=modes+of+cooperation+in+parasitic+colonies&source=bl&ots=sI4UhaGM1a&sig=DaDiwGU0F7ajSEL2psqcvhyRUiY&hl=en&ei=FKhVTYbQGI6AhQeIh6TDDA&sa=X&oi=book_result&ct=result&resnum=1&ved=0CBsQ6AEwAA#v=onepage&q&f=true

Apart from the BOE's/MPC's abject failure to achieve its stated aim of controlling UK inflation by the easiest and most ridiculous measure of inflation ... CPI, what I don't think that 'they' communicate very well and what I have never seen mentioned anywhere in the main economic journals, or in the economic sections of the national newspapers is this:

Raising interest rates is inflationery in the 'short run', in the domestic economy as it raises the cost of borrowing to businesses and households with mortgages and credit card and other debts. This may be the real reason why the MPC has not already raised interest rates i.e. as the underlying reason for not doing this because this would itself be inflationery OVERALL unless the BOE/MPC could offset the effects by being sure that the interest rate rise would achieve a commensurate appreciation in GB £ sterling.

That judgement there as to who wins and loses with interest rate increases, is increasingly looking like a 'political judgement' and I cannot conceivably understand why this decision is within the remit of the MPC as they never discuss this point, at least in public and even crediting the MPC with this level of analysis seems 'over generous', I'm afraid, as I'm not sure that the MPC is even anywhere near explaining how it arrives at its interest rate decisions.

What we never see is any proper study to see what the MPC is considering when it considers interest rate decisions i.e. detailed projections about increased revenue to banks with higher interest rates, higher insolvencies and welfare payments to those losing their homes with higher interest rates etc, higher tax takings to the HM Treasury with higher bank 'profits' ... May be I'm being cynical ... but does anyone at the BOE seriously expect us to to believe that the MPC is considering this stuff in sufficient and relevant detail?

The question is reasonable as the MPC is failing to control UK inflation and there are number of things the govt can do to try and delay interest rate increases and get the right level of UK interest rates/inflation control e.g.

1) organise a strong and comprehensive buy British campaign and try and offset the effects of foreign import inflation
2) announce a Jan 2012 hefty reduction in VAT in the March budget as financed by selective modern protectionism
3) strengthen UK materials recycling and try and reduce the amount of imports of foreign commodities /materials
4) flatten out the 'price creeping' supermarket and energy company cartels

The 'naysayers' will of course, reject the ideas ... the problem with them is that they have 'no idea'.

The economic circumstances of the UK are such that is seems that the MPC is being required to make decisions on critical aspects of the economy that require political aswell as economic judgement. The MPC's clear reluctance to make any public confidence inspiring statements here is a clear indication that the MPC set up is a 'mistake' that has failed and urgently needs to be addressed i.e. terminated ... the MPC has become a very unfunny joke that we are all paying a very high price for.

Urgent attention needed ... this all far too serious to be allowed to keep 'drifting' as the next few months are crucial with the March budget etc ... decions made in the next few weeks will likely substantially affect the UK's economic performance for the next 10-15 years.

The best solution ... keep UK interest rates relatively 'low' as the highest priority but 0.5 % is now too low (0.5% - 1% much better)

Reduce VAT by 5% plus asap ... it is far too high ... make up the loss in VAT revenue with 'selective modern protectionism' and a 'Buy British campaign'.

Give more help too those who are victims of the credit crunch/real economy recession by avoiding unnecessary bank reposession misery ... the banks should take more strain here on domestic property ... not everyone losing their home 'deserves it' as the vultures would have us all believe, as they count and bleat over their bonus pots.

If we can't ourselves buy British to strengthen the British economy ... then we must 'deserve it'?

Stephanie

If you had bothered to plot the £ vs $ exchange rate on the same graph you would have seen a very good correlation between the cost of goods inflation and the exchange rate. The inflation we are seeing is almost entirely to do with our exchange rate, rather than "home grown" cost increases. This is a consequence of our overall poor global economic competitiveness and massive government overspending rather than anything the BOE has direct control over such as interest rates. OK raising interest rates might prop up sterling a bit but at the cost of even further deflation of the economy. The only way out of this is improved efficiency and innovation so that we earn our way out. That and a government that doesn't waste money on the scale that has been regularly reported by the parliamentary public accounts committee this last fifteen years. Just go and look at the tens of billions of budget overspends by the previous administration recorded on their website. Its no wonder the nation is destitute.

Hi markus-uk,
to summarize my answer (@41) to your comment at 40. You have to internalize the philosophy and all the emotions of your competitor, you have to let it sink deep into your mind (heart?) and only than, with, what we use(d) to call Christian love, you can transform it and make it work to your advantage. (and I hope the moderators had a good laugh with a chill, if nobody else will, thank you)

The Bank of England should not have a consistent approach to inflation.

During the credit boom of 2000-2007 the bank would have made a mistake to keep interest rates very low just because imported goods were falling in price. Focussing on the overall price level made sense at that point. The Bank could have raised rates further given the housing bubble.

Now we are in DELEVERAGING territory, THINGS ARE DIFFERENT. This calls for a difference stance of the Bank towards inflation. Slightly higher inflation (only 4%) is desirable in an economy where borrowers are struggling and deleveraging threatens to sink the recovery.

The Bank of England should be crammed full of experts.
But between 2002 and 2008 they were all asleep.....just like Gordon Brown and the New Labour crew.
Were they asleep on the job? Were they wallowing in the temporary glory? Or is it that they just couldn't be bothered to wake up and put the brakes on, or at least introduce some sense?
The BOE should consider this...
If another chaotic banking shambles occurs again, no-one will be bailed out (or quantitively-eased out). There will be no money and no credibility left to do it.
The City of London will be ruined, finished, investors will disappear and London will go back to selling fruit and vegetables.
The pensions industry will also collapse.
All those "take a fortune and run" merchants who currently infest core-finance will have scooted overseas with their booty, leaving everyone in London (and the BOE) on 25k, like the rest of us.
The UK without the City? ...That could be the end result of all the greed and apathy in the money-handling industry.
The UK without the City.
Near-zero rates are simply "desperation".
Wake up BOE, and stay awake, or in future?

#9 >>Is this a theory? Or is this based on what is actually happening in the world right now? I don´t know let´s ask Hosni Mubarak.

You certainly may, if you can find him !! I believe he's not exactly in any mood for an interview !! :-)

I totally agree with John_from_Hendon, (30) and suspect that this is what happens when you (BOE) are protecting not the people of this country but the large corporate operations which they see as so important to the nation’s health (read the banks health).

Any measurement of inflation that discounts large areas of the economy from the point of view of the “normal” men and women of this nation should be simply ignored; they are political tools only that fit nicely in Excel spreadsheets.

Collapsing asset price inflation now becomes more and more difficult as each week passes leading to yet another crisis at some stage especially in the housing market where the write down of values is now set to happen in a time frame that could be very damaging.

The BOE only have the one tool but have not used it…inflation “in the pipe” is leading in only one direction.

It’s now a no-win situation for the BOE and its starting to look more and more like our elected leaders are nothing more than spokespersons for the big international operations that have become so powerful in the last ten years… the mere threat of leaving the country sends shivers down their spine.

Clearly the BOE are not acting in the nation’s best interest I submit, but in the interests of some dark and unelected “force”, not visible to the normal people of this country.

“We are all in this together, the Big Society”… only when it comes down to paying the piper.

The BBC is a polite and balanced organisation.
But if you want to see a brutal weekly assessment of the Western "financial establishment", watch Max Keiser.
Are all the worlds tyrants and despots political leaders?
Or in the West, are they in the financial industry?
Despots treat the public with disdain.
Think about it.
The BOE has nothing to do with "financial tyrants", but it is supposed to be part of the machinery that regulates the "corporate despots".

#27 >>The confusion of 'INFLATION' (money supply inflation = cause) with 'inflation' (CPI/RPI price inflation = effect) is so serious that a new term ought to be invented for one of them.

Perhaps INFLATION, as you defined it, should be re-labeled as GOOD INTENTIONS, as in "The road to Hell....."

Some/many on this blog have warned about the effect of that QuEasing since it was first mooted but others have said that we can't victimise those poor big spenders who have maxed their credit cards and have borrowed at 125% of their property value and at 7 or more times their income !! And now it has come to pass.....

Simply expanding the money supply without expanding the *real* value of the national assets/reserves will eventually lead to inflation of Zimbabwean proportions !!

#34 >>The primary purpose of the BoE and the MPC is to establish and maintain STABILITY in the entire monetary system.

Does the quid losing 20+% of its value since 2008 constitute "STABILITY in the entire monetary system" ??

A significant part of local inflation, especially in food inflation, is because the imported goods, including food, cost more devalued quids now !! And why has the quid lost so much value in such a short spam of time ?? Could it have anything to do with the BoE simply printing more "paper" money to pay for the Great Gordo's spend, spend, spend policies ?? Could it have anything to do with all that borrowed money to pay for all those announcements about the "green shoots of recovery" that look more like mirages by the day ??

Let us remember the opening words of George Osborne in the house a few days ago. "Britain had the biggest housing bubble, bigger than the USA, bigger than Ireland..."

Even his Treasury officials, who wrote his speech, know what they did - that is not surprising as they are the same people who created and stood by and did nothing but watch the bubble expand!

They, (Nick Macpherson and his predecessor Gus O'Donnell - now Cabinet Secretary) and their puppet Mervyn King, are responsible for the destruction of the British Nation.

They created the tripartite system of (non) regulation that was so disastrous.

It was obvious to anyone with eyes to see at the time that interest rates were far too low for the whole of the noughties and they are still far too low now. They created debt-junkies from a prudent people.

Why do the French pay-off their credit cards every month? Why do the French have half the debt levels of the British? Why is the French economy recovering so much more vibrantly than ours? We have to get our debt levels down to French levels BEFORE we can revitalise our economy - yet the 'Fools' want to push up debt and do nothing about grossly overinflated asset (house) prices that support totally fake bank balance sheets!

The Middle East is in revolt.
People are reacting against unwanted leaders that they feel are damaging the prospects of ordinary families, whilst filling their own pockets with the nations wealth.
In the West we don't have that sort of nasty arrangement.
Or do we?
We have bankers.
We have core-finance.
We have a problem.
Not relevant to the article?
Well, why is the article there at all?....
because of the dodgy state of UK finances, and many would say, because of the "despotic" behaviour of our financial industry.
Desperate interest rates, the BOE, debt problems, cutbacks for ordinary people.....is it not just the inevitable outcome of giving Western financial corporate tyrants free-rein.

To the people who think that the definition of inflation is increase in money supply then no that is not the case. Inflation is exactly what is says on the tin. RPI = Retail Price Index. CPI = Consumer Price Index. Basically the change in cost of an index of the average basket of goods that you and I are assumed to purchase monthly. Increase in money supply may or may not be a cause of (price) inflation.

However current economic orthodoxy assumes that wage inflation is overwhelmingly the main driver of (price) inflation and as such the current spikes in cost of energy, food, commodities compounded by weaker sterling are assumed to be temporary effects as long as wage inflation is low (as it is).

This is patently rubbish, and I fear that blindly following this orthodoxy will lead to disaster. Even if the remit of the MPC and BoE is maintaining stability of the financial system as a whole (not just price stability), and in that measure they are doing a fine job as otherwise the system would be broken, I fear that the political and social costs of maintaining this system will be too great.

#43 >>1) organise a strong and comprehensive buy British campaign and try and offset the effects of foreign import inflation

This can only work *IF* and only if the goods produced in Britain is at or below the cost of imported goods !! If the costs are higher, then it only exarcebates the problem !!

>>2) announce a Jan 2012 hefty reduction in VAT in the March budget as financed by selective modern protectionism

No comments here !!

>>3) strengthen UK materials recycling and try and reduce the amount of imports of foreign commodities /materials

Add in the energy cost of recycling and compare that final cost to that of imported commodities/materials !! And, please, please, please, don't mention recycling beer to the landlord of my local !!

>>4) flatten out the 'price creeping' supermarket and energy company cartels

This would be an interesting exercise to see.

>>The 'naysayers' will of course, reject the ideas ... the problem with them is that they have 'no idea'.

>>If we can't ourselves buy British to strengthen the British economy ... then we must 'deserve it'?

If we can't "Make British" sufficiently competetively to attract people to "Buy British" then what you are suggesting becomes a command economy !!

51 has it exactly right.

If the money supply expands at the same rate as the growth in economic value of assets in the economy then it will not cause inflation.

QE is the mistaken believe that expanding the money supply will hold up the value of assets. Instead it is holding up their (market) price not value. The cost will be a long term erosion in economic productivity and price inflation, i.e. austerity.

BobRocket post 38 I agree we live in interesting times. I will give you my thoughts on just how interesting these times will be.

About 18 months ago I and a number of other posters on Robert Peston's blog raised the spectre of stagflation coming over the horizon unless something was done. It seems sadly we are already there.

I am convinced that it is unoffical government and BofE policy that a little bit of inflation is a good thing. Those older than me can remember where that leads us.

Both the UK government and the average consumer has debts that without a little help from some inflationary real cost adjustment we cannot pay, at least without other consumption falling off a cliff.

My girlfriend is a classic example of this. She has a mortgage on a flat she bought in 2005 close to the peak of the boom. Like most inner city flats it isn't worth what her mortgage is outstanding. From my experience of the early 90's it will likely take 5 years for the market to correct itself so that she won't be in positive equity for years unless our friend Mr Inflation helps out to reduce the real cost of her debt.

She is trying to pay down her credit cards debts as quickly as she can as like most graduates of her generation she had debts to pretty much everyone. Fortunately her car loan will be finished in a few months.

Like no doubt tens, if not hundreds, of thousands of people like her and in the same position any movement on interest rates upwards by any significant amount will push her finances over the edge.

I think the BofE and the government daredn't move on interest rates in case it totally derails the property market and pushes millions towards CVA'a and bankruptcy.

Interesting times indeed!

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:

Retail price index (all items) RP02:
Jan 2009 210.1
Dec 2010 228.4
Price inflation = + 8.7% (v.a.t. increase yet to be added)

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%

(All figures are sourced from the Office for National Statistics website)

If you're an average working Joe in the private sector (like me), the spending power of your weekly earnings is 11.4% less than it was two years ago.

Your asking us to pay rather a high price for bailing out these banks Mr King.

#38 BobRocket
...As far as I can tell the money supply has fallen off a cliff, if we measured the price index of everything (rather than just a subset) we would see deflation (dis-inflation)...

I still wonder about derivatives. There were a lot of 'toxic assets' which were not priceable. As they reflate - because many presumably still survive - will they not create a lot more money ? They are 'liquid', are they not ?

I also happened across this fascinating article, probably more suited to the Robert Peston blog, about how banks make big profits on fees for derivatives....It would be like a real estate agent selling a house, but the buyer knowing only what he paid and the seller knowing only what he received. The agent would pocket the difference as his fee, rather than disclose it. Moreover, only the real estate agent — and neither buyer nor seller — would have easy access to the prices paid recently for other homes on the same block. ...

The metaphorical 'real estate agents' are banks, of course.

The low interest rate and Quantitative Easing suits the Government and the Banks as these measures fuel inflation and the 'house price bubble'.
High Inflation reduces the value of the debts run up by Governments but also reduces the value of savings and the purchasing power of the money in your pocket. This is tantamount to theft by the Goverment and the Banks by devious methods.
Deflation was never going to happen, the 'scare mongering' was mis-information to legitimize the actions that have and still are fuelling inflation.
The move away from RPI as the measure of inflation just disguises the 'headline' rate of inflation.
When will the Goverment have the courage and foresight to bring in the necessary controls.

It is refreshing to see you at least mention the subject of inflation Stephanie.You so rarely seem too.
On that subject do you still think as you told us in October?
"With the possible - very limited - exception of inflation expectations, it is hard to identify a single indicator suggesting inflation is about to pick up."
If you have changed your mind it would be interesting to know the reasons why.

58. At 11:01am on 12 Feb 2011, Ian_the_chopper wrote:
My girlfriend is a classic example of this. She has a mortgage on a flat she bought in 2005 close to the peak of the boom. Like most inner city flats it isn't worth what her mortgage is outstanding. From my experience of the early 90's it will likely take 5 years for the market to correct itself so that she won't be in positive equity for years unless our friend Mr Inflation helps out to reduce the real cost of her debt.
===================================================================

This is another common fallacy of the current economic orthodoxy which confuses inflation with wage inflation. Inflation will NOT reduce the real cost of debt UNLESS your wage grows faster than the rate of (price) inflation. This isn't happening. In fact it will make debt repayment even harder.

Think about. Let's say your girlfriend earns 20,000 p.a. after taxes and has a mortgage of 150,000 at borrowing rate of 4%. Retail prices increase by 5%, her salary increases by 1%, and her debt increases by 4%. Her debts may be slightly lower in terms of a loaf bread but are actually higher in terms of her ability to repay, i.e. wages. And because more of her wages are required to buy the same amount of a basket of goods then she has actually less to spend on debt repayments, and certainly much less disposable income.

The low interest rate and Quantitative Easing suits the Government and the Banks as these measures fuel inflation and the 'house price bubble'


Just checked my house price index on the nationwide index between Q1 2008 and Q4 2010. This is the period of the lowest base rates on record. A drop of 10%. Some bubble.

After QE at the end of 2010 the money supply is now actually falling according to Government Stats so how do you make the connection between QE and inflation?

QE is not printing money. It is paying off Govt debt. The money received, as others have pointed out appears to be going straight back into financial assets.

Since we have high inflation and high uemployment it's worth recalling that a while ago you spoke about inflation and spare capacity - how much, if any, is there? etc. - so maybe this is something you could re-visit. As your chart shows, in the early part of this century the price of imported goods, mostly from China, had a deflationary effect but imported goods, priced lower than equivalent domestically produced goods, have been having quantitative and qualitative effect on our economy for decades.

Those of a certain age will remember when, if you shopped at, say, M & S, Halfords, Debenhams, Comet or a local car dealer, the clothes, bikes, car parts, furnishings, electrical equipment and motor vehicles on offer were mostly designed and made in this country. To borrow Labour's current catch phrase,'up and down the country' millions of people earnt a living making these goods.

Now, free trade has meant that consumers in this country get these types of goods much cheaper than if they were made here. However, as the price of these imported goods goes up, as it seems to be suggested they will in the foreseeable future, and that this inflationary pressure is largely out of the MPC's control, it has some consequences I think you should look at.

First, it may be that when imported goods reach a certain price it's posible that, once again, we could produce them in this country.

Second, with the unusual - well, unusual if you are lashed to the mast of classical economics - mix of high unemployment and rising inflation, there is, unless you're a city investment banker (couldn't resisist it!), a fair bit of downward pressure on wages as most people in work are just glad to have a job. This means the point when it becomes economical to produce imported goods here may come sooner.

Third, there is the murky problem of spare capacity. In terms of quantity we may have the people to make these goods but, qualitatively speaking, not the skills, know-how and so on. Also, where are the buildings and machinery that once churned out clothes, TVs,car parts, bicycles, electrical goods and home furnishings to be sold on our high streets?. Apart from vehicle manufacturing, which consists largely of outlying subsidiary plants of multination companies based elsewhere, most of our remaining makers of goods are relatively small, specialist concerns catering for a niche market and, as a consequence, are probably not blessed with large amounts of spare capacity to compete with increasingly more expensive imported goods.

In short, then, inflation caused by rising prices of imports could provide an opportunity to revitalize the production of goods made in this country. However, I'd say that the capacity to do so has largely been wiped out over the last forty or fifty years. The MPC, pulling this or that economic lever, is powerless to deal with this issue...just as it seems to be ineffectual when it comes to inflation.

Mind you, it doesn't seem likely that we will suddenly start mass producing clothes, TVs/electrical goods, bike and car parts, toys and so on, when there may be another deflationary push from abroad soon when manufacturers find new countries with lower labour costs than China.

Perhaps specifically targeted fiscal policies at certain areas of business may help where the price of some imported goods has made it vialble to produce them here. As the Japanese did many years ago, we could identify promising consumer good technologies - say, solar panels, or fuel cell driven gadgets - and then, tapping in to the wealth of innovative scientific, technical and engineering talent at our universities and research institutes, improve on them and offer the world a high quality, cheap, massed produced good with 'made in Britain' stamped on it.

Inflation is a monetary symptom of things going on in the realm of people making, buying and selling things. Of course, by increasing or decreasing the supply of money the MPC may appear to have some effect, and may even provide a temporary increase or decrease in economic activity through such action, but the end result is that prices simply settle at a new higher or lower rate without any effect on the real quantity or quality of actual economic output. The MPC may have little control over inflation but it has virtually no ability to effect the take-up of spare capacity in our economy to start replacing some of the things we import with home produced goods and also to innovate with new consumer goods... So, having gone full circle like Michael Palin, maybe that's why we have high unemployment/spare capacity and inflation.

56. At 10:45am on 12 Feb 2011, ishkandar wrote:

Hi Ishkander

#43 >>1) organise a strong and comprehensive buy British campaign and try and offset the effects of foreign import inflation

This can only work *IF* and only if the goods produced in Britain is at or below the cost of imported goods !! If the costs are higher, then it only exarcebates the problem !!
............
A) It will work ... for British workers ... it is not all about costs and money ... its also about the maxiumum number of British people having stable and sufficinetly well paid jobs (with now more than 50% of the UK population now receiving some kind of govt handout)

>>2) announce a Jan 2012 hefty reduction in VAT in the March budget as financed by selective modern protectionism

No comments here !!

>>3) strengthen UK materials recycling and try and reduce the amount of imports of foreign commodities /materials

Add in the energy cost of recycling and compare that final cost to that of imported commodities/materials !! And, please, please, please, don't mention recycling beer to the landlord of my local !!

A) You have a primitive view of recycling ... the reason that recycling does not work better and have more optimal output values in the UK ... is that we don't do enough of it to turn the 'point of equilibrium' where it would become worthwhile doing more and more and make the policy work and receycling become economically efficient as probably teh main new industry in our economy ... we have to make it work

>>4) flatten out the 'price creeping' supermarket and energy company cartels

This would be an interesting exercise to see.

>>The 'naysayers' will of course, reject the ideas ... the problem with them is that they have 'no idea'.

>>If we can't ourselves buy British to strengthen the British economy ... then we must 'deserve it'?

If we can't "Make British" sufficiently competetively to attract people to "Buy British" then what you are suggesting becomes a command economy !!
...............

Kind of ... Yes ... I can see that you are getting the hang of this ... Britain cannot compete with global trade in conventional pricing terms as e.g. our UK cost base and living standards and expectations of all and sundry are higher than what our country can currently sustain. The options are painful here:

- consume less
- watch less adverstisements on TV for junk food etc
- be paid less
- have less choice in the shops
- excercise choice to restrict our consumer preferences and buy British
- have a much tougher competition policy for restricting the size and bargaining power of companies in the UK (after stripping out much of the nonsense red tape and employment law restrictions, so that there is more competition between businesses, less job security but more job opportunities).

Ultimately, the 'UK is' and 'we are' to some extent the product of everything that we choose to spend our money on ... some of our problems are beyond our control and due to educational standards and informational issues ... but generally, the UK will stand or fall based on consumer preferences and consumer choice as much as anything ... the supermarkets don't help by bombarding us with foreign produced food while in Uk farmyards - milk churns rust and cowsheds stand empty and some UK farms have fields that have not been ploughed, grazed or planted for 15-20 years.

Perhaps we do really 'deserve it' in Britain ... we can make the conscious decision to lift ourselves out of the slump and place our purchasing power better... but that takes national leadership to have enough scale and I don't see any at the moment that can make a real difference ... someone has to 'take up the mace and swing it'
(metaphorically speaking)

Cheers

65. At 3:02pm on 12 Feb 2011, BJK

Agree with every word. Excellent post.

I would only add that all recent governments including this shower have negelected to recognise the fiscal power at their disposal to both aim for full employment and to kick start industries and technologies. Calling in the head of Tesco and asking what he can do does not count.

Indeed they have done exactly the opposite in using higher unemployment as a tool to either be 'prudent' or to 'pay off the nation's credit card', thus ensuring the skills we deparately need are lost and at the same time developing an underclass in our society whom they disregard and do not count as 'spare capacity' when they pursue their silly policies aimed at keeping the beast of inflation under control.

You won't find any mainstream economist or commentator making the same sensible points that you have just made. You are on the right track.

Cheers

Inflation is an economic tool.
Headline news is US trade deficit widened by 33% in 2010.
Uk has a similar trade deficit efficiency and as it grows year on year, how is that deficit funded. That is an underlying problem that is not understood, and that is a significant inflationary pressure which exists but is not recognised. The trade deficit is the problem, dummy.
On a more elitist note, if anyone believes that dumping Trafalgar day is in the interest of this country, they really do not belong living here. l will not turn a blind a eye to it.
There is opinion that private business practices are supremely efficient. That view is errant. Public service exists for principled reason and good management is a principle that should apply to all endevour.
Business practice is elitist, it is not efficient and will always run at cost plus to some 20 per cent excess. It is a process of reward, it is a systemic abuse. It is the law of the bazaar, unprincipled and as two faced as the Rubic Cube. That Public Services cannot be efficiently managed is a fairy tale and those telling that story are robber barons who acumulate billions in lucre that sloshes around peddaling poor and ill gotten influence.
The balance of trade and financing it are, were and ever more will be the problem that faces UK, until someone winds up Chancellor GO and ticks off his predecessors. That cumulative deficit has to be funded.

#65. BJK wrote:

"...we could identify promising consumer good technologies - say, solar panels..."

One tiny, but highly significant point: it is cheaper to make solar cells in China and import them as the cost of the premises needed is so much less expensive there. Solar panels are fairly large and need space to make. It is also advantageous not to have to pay too much to dispose of the bi-products (some toxic).

So unless and until we get our absurd property prices down none of your sensible suggestions can come to pass. And guess what the 'Fools' are doing their very best to create another property bubble!!! They really have to go and the economic philosophy they operate on must be modified.

If we wish to be internationally competitive we have to have internationally competitive property prices. There is no other alternative. The way we are going will have an 'economy' with very high levels of un and under employment, a stagnant economy and an even bigger disparity between the very few super rich and the rest of us.

Ken Clarke knows this and that his why he issued his warning to the middle class today - five years of Tory rule will create the situation in the UK where there are just two classes - the super-rich and the poor. The middle class is to be finally abolished by the Tories - Mrs Thatcher tried it when she destroyed the lower middle-class blue-collar jobs now it is David Cameron's objective to abolish the upper middle-class white-collar jobs - then the destruction of the middle class will be complete! Ken Clarke knows this and it is worrying even him. We need the modern 'dead sheep' to savage David Cameron before it is too late! Ken you must accept this mantle!

Are all the MPC members on index linked salaries? It was well reported that Mervyn King has a gold plated lucrative index linked Pension, which hopefully he will be put out to grass to use very shortly.

Now surely, having an index linked Pension, when most of the population does not, means that a policy of rampant inflation benefits HIM and not the man on the street. In fact, it doubly benefits him, in the sense that the gap between his income and the normal man will widen.

In my book this a reward for failure. Surely all the MPC should not have salary or pension benefits that increase by more than the 2% target that it is their job to maintain.

#69. So unless and until we get our absurd property prices down none of your sensible suggestions can come to pass.

...Tory rule will create the situation in the UK where there are just two classes - the super-rich and the poor.

John, the problem I see is that if there is a price correction, which seems logically inevitable, by the time it happens it will just mean the rich buy up even more of the property, so the previous middle-class owner-occupiers now become the renters. Even with lower house prices, the starvation of credit for the next 10 years will still hinder the non-rich from ownership.

#69 JFH

It's the labour in China that's cheap John. Cheap exploited labour keeps the price of everything down so you need to ask what came first pay rises, cheap credit or property bubbles. The consequences of open global trade are inevitible, the tide cannot be turned, we are over valued as an economy so we're trying to stagnate waiting for either Asia to catch up or the West to devalue without causing too much distress. Unfortunately a western collapse is more likely.

I agree with jonearle such that even rapid devaluation won't save us now, the financial world has changed such that I fear history is of no use to us, this is uncharted territory which millions of bankruptcies and real interest rates can't help, we can't devalue enough without taking all the banks out or providing massive public assistance but how can you provide this assistance while you devalue an economy by half. I think we're heading for third world poverty, and there's nothing we can do about it.

@ 65 & 69

I seem to remember when Dyson moved manufacturing operations to Malaysia one of the reason he gave was the difficulty of acquiring land for expansion. Still, he expanded the business using the money he saved!

I think the Base Rate setters (look I'm beginning to balk at saying MPC!) are not totally impotent when addressing the problem inflation caused by an increase in the price of imported goods. True they can't do much if an overseas producer increases prices, but if the cost increase is due a shift in exchange rates that's a different matter. To some extent the value of the Pound is affected by interest rates - I know it's not the only factor. As everyone knows, a weaker currency is a double-edge sword. Cheaper exports; dearer imports. The currency wars are about boosting growth by exports and inflating away debt. One thing Merv does well is "talk down the pound".

@ 72 I agree, NSH.

From a world power to one of the poorest countries in Europe in a couple of hundred years. It's been done before. Look at Portugal. (... and it's not all down to the use of screw-top wine bottles)

How far along the timeline do you think we are? About about a third, perhaps a bit less.

There's an highly misleading element here.

One reason why rpi inflation is currently running above the cpi levels is that their rate above BoE's variable rate that banks are insisting upon for NEW mortgages is greater now than at any time for several decades. It's worth pointing out that the overwhelming majority of mortgage payers DO NOT pay those current interest rates. Or anything like them.

Moreover, when measuring the 'mortgage cost of homes' the ONS uses not the actual rates households are paying, but the current offer rates - which are now much higher. As far as I'm aware, no other price in the rpi is not an actual.

So. Allegations that the 'rpi rate' is higher than 'cpi' are not untruthful but DECEPTIVE. Because nobody knows what the real mortgage costs are.

#72. NorthSeaHalibut #73 The-itinerant-ex-pat

There is a deep and fundamental contradiction in the attitude that says that we can't compete and so we are doomed. Your argument is inchoate. That is to say that you have not followed through the consequences of being 'doomed'.

To illustrate my point look at historical examples of the collapse and rebuilding of a country, regime and currency. And while we are at it I do not accept your contention that history can teach us nothing - this is just the argument of those who are destined to relive the same errors as others did in the past.

Germany: after the great war the economy collapsed and so did the currency in the Weimar republic - but look at Germany today, an economic powerhouse. That is a lesson from history: doom has within it the seeds of re-birth. So economic doom is not the end. When one realises this and grasps this then doom is not to be feared, but rejoiced in as it is a new beginning, indeed without doom there can be no new beginning. This is not a philosophical point. It is the acceptance of the end that creates the new.

In economic terms - economics and the passage of time should lead informed and flexible analysts to understand that what seems impossible today, once accepted, is the source of new growth.

This economic philosophy leads directly to the understanding that the lessons of recessions, bubbles and depressions is that debt must be first deflated before recovery can really re-start. (I'll not cite historical sources for this as I have done so before.)

So up with interest rates - get the debt (housing) bubble deflated PDQ and then we can have some hope of competing. My arguments come from a way of seeing that the inevitable must be grasped and then there is a new and sound path to recovery.

What goes against this is the 'group think' or orthodoxy and I fear its contagion is still both pernicious and crushing us. The old argument that "there is nothing to fear except fear itself" is obviously an oxymoron as it is self contributory and so is the idea that we are economically doomed and that economic doom is an end. It is not it is both end and beginning if seem in the right light. The problem with the British sensibility is that bankruptcy is seen as final and that we choose to ignore Chapter 11 that sees bankruptcy as an opportunity to put things on a sounder footing.

@ JfH


Portugal or Germany. As I said in an earlier post on one of Steph's blogs - Maybe we should replace the BoE with the Bundesbank.

I'm not saying nothing can be done - I'm saying nothing will be done.

I have an uneasy feeling that the men in grey suits have control and when the City of London no longer suits their purpose they'll beggar off somewhere else. These guys have a lot to answer for - I'm now using Julia Finch's 25 as a dart board. It helps.

My reason for pessimism - The people who contributed to this mess are still around. Just take one man. The fact the Mr King is still here and not long since gone to Greenspan & Co. is nothing short of a national disgrace.

I'm convinced that a Base Rate of 0.5% is nothing to do with inflation, growth or employment (the 3 things the MPC must consider - inflation being the most important). It's about the Banks- Period -as our cousins say.
Consumption dropped off the cliff because of aggressive rate cutting between October '08 and March '09. Cutting rates like that in response to banking problems was enough to scare T C Mits to death - no wonder he stopped spending. It didn't take much, he was already concerned about this new thing called "sub-prime".


Off course it's possible, and very desirable, to turn things around - for the sake of the great British public. I just don't think it's likely - and yes, there are opportunities too.

My Dad used to say that every problem was an opportunity in disguise - trouble was some opportunities are insurmountable!

I lost half a sentence from post 77. After "sub-prime". ---
and we had had a crazy summer of price increases- oil (almost $150/barrel), food and energy.

Then - Of course.... ----- although " Off course " might turn out to be right. :-)

I was once told that for every setback an opportunity existed… it all depended on your perception at the time.

John_from_hendon takes the view (as do I) that current U.K. house prices are still way above what they should be. This cannot now be addressed in a time frame that would limit the pain for those that could end up with negative equity when property prices revert to (estimate) about four times the average industrial wage (as more women now wok), this equates to about a further 40% reduction in average house prices.

It’s the BOE that you can blame for this which should have slowly increased the lending rate by now to about 4% or so. They (BOE) are tasked with controlling inflation which for the next year can only rise further by whatever method is used to measure it.

Depending on where you live (London is the exception) house prices are currently flat or falling slightly, all those still on tracker mortgages that live in London have in effect seen a real increase in there disposable income of some magnitude, whereas council tenants living in the same or similar locations have seen nothing but rises and this is set to accelerate this year when new tenants rent is pegged to a percentage of the private sectors markers for the respective location.

Quite simply if the housing market is not re-valued (downgraded) soon there will be what Boris Johnson called an “ethnic cleansing” in the centre of all large metropolises, with empty dwellings everywhere. Who will benefit?

Of course market forces will intervene but it’s the BOE that’s stopping this, in effect keeping property prices way above where they should be.

Where are all these displaced people going to go, it will cost more to house them outside the major metropolises where rents are “affordable” but then they still have to travel to work decreasing their disposable income further, indeed many wont I suspect…they will join the ranks of the unemployed. This is serious as the companies that employed them will not be able to find alternative employees at the same cost so their wage base costs will increase substantially and they will then consider moving out (relocating) to where the cheap labour is as has happened before.

The above has to be balanced against those who have gained from the current situation as interest rates must in fact go up, this cannot now be avoided, the longer its left the worse the damage will be.

If you’re on a tracker mortgage now then be prepared for a 50% hike in your repayments as in effect the BOE have made sure that interest hikes cannot now happen slowly as the “full metal jacket” of inflation takes grip.

#65 BJK
...Apart from vehicle manufacturing, which consists largely of outlying subsidiary plants of multination companies based elsewhere, most of our remaining makers of goods are relatively small, specialist concerns catering for a niche market and, as a consequence, are probably not blessed with large amounts of spare capacity to compete with increasingly more expensive imported goods....

Is this not the reason the current government keep trying to get the banks to lend more to SMEs ? Many SMEs are potentially new manufacturers. It is also true that manufacturing industry is the largest growth are in our economy.

#76 John_from_Hendon
As a matter of information - because I dislike ad hominem comment - I generally read your comments only up to the point where you mention the 'Fools' or similar because I do not like streams of invective. I read this one all the way through and it was interesting.

re #77 & 78
Think you also got your years wrong - 2007 and 2008 would be more correct. You could of course have added the abolition of the 10% tax band which was a remarkable event in '08 and probably one of the key 'triggers'.

I agree that the BoE was remarkably deficient, as was the FSA. But can we now say, do we now know following the Oakeshott resignation, that it was also - possibly - a (large?) measure of Treasury incompetence that got us where we are now?

In terms of 'clearing up' {we are really more focused at present on what is ahead}, the other big question mark hangs over the accountants, their institutes and the bodies that agree international accounting standards. And the stock exchanges. It has just occurred to me that the reason exchanges are now merging is to parcel up future liabilities claims in company shells with no assets? Must remember to post that to Robert Peston who was asking the question why on his Blog.

If there is ever a time for Michael Ancram to get up in front of a microphone and call for a full enquiry, 'tis now. But who would do it? Who has clean enough hands?

T-i-e-p: 'I'm convinced that a Base Rate of 0.5% is nothing to do with inflation, growth or employment (the 3 things the MPC must consider - inflation being the most important). It's about the Banks- Period -as our cousins say.'
----------------------------------------------------------------------
My post isn't a hole picking exercise (although it probably seesm like it now!) but I would add housing to that. For sure the banks are currently big beneficiaries. GO could have scored big brownie points last summer by getting together with the BoE and Treasury, the BBA and consumer people to 'regulate' interest rate spreads for a while.

But don't forget: the Tories are also remembered for achieving the unthinkable in the early '90's - collapsing the UK housing market.

I think that was an additional pressure to both the GB/AD thinking & strategy as well as being in the Coalition's mind, no doubt, right now. That would also be true of the BoE/MPC and Treasury for both administrations. Maybe as well as blaming all sorts of people in banks and Lola, we should add Kirsty & Phil and Sarah beaney to the list ...

PS: Who is TC Mits? A distant relative of Nick Strong and Joe Soap?

#80. Clive Hill

I pity you, if you set yourself, arbitrary barriers to communication such as suggesting that argument must not turn to specific and well established rhetorical forms and structures or you will cease to read it. It is my feeling that blogging is more akin to public speaking in structure and form so whilst the forms of detailed logical exposition such as one would use in theses, treaties or other long-forms of writing are more inappropriate that the rhetorical forms one would use in public speaking are more appropriate. I wonder what the Ancient Greeks would say about the appropriate forms of language for blogging?

T C Mits = The Celebrated Man in the Street .

make merve (the swerve) king , the manager of man utd, i love to see them struggle a bit.

There are a couple of major flaws in your reasoning...

First, you ackonwledge yourself that you mix apples with oranges with your statistics ( for RPI and CPI targetting periods ) to reach your conclusion, once these periods are separated the argument falls apart. The CPI period has been significantly over target whereas the RPI period was reasonably close ( and no one complains about that or Sir E George's performance ).

Second, the MPC's target is Medium Term. I'm not aware of a clear definition of this, but expect it would be less than the entire period since BoE independence, something more like 5-6 years would be sensible. So, once again, the comparison since 1997 is invalid and the Bank's performance appears less satisfactory.

#81. Up2snuff wrote/cited:

"the other big question mark hangs over the accountants, their institutes and the bodies that agree international accounting standards"

I share your concerns about Accountancy and the law and structures that govern auditing and the production of a true and fair view contained in accounts.

There must be something fundamentally wrong with the standards and procedure of auditing if the accountants did not insist that banks and other financial institutions properly estimated their liabilities and risk (of their trading model).

It should not have been Basel 2 that insisted on 'Mark-to-Market', but the auditors. In not doing so the auditors were derelict in the duty. There is an underlying element in auditing that makes the auditor express an opinion on the ability of a business to continue using it current business model - clearly auditors forgot this. Nothing has yet been done about this.

My suspicion that this dereliction of duty results from the incestuous relationship between auditors and their clients - that managements of the mega corporations which they serve and who actually appoint and dismiss them. Even though auditors are supposed to be appointed by and report to the members of a company - that is the shareholders.

What should, or can be done? Break up the big (3 or 4) auditors. Insist that all companies change auditors every year. Prevent auditors having any relationship with accounting or consultancy businesses. Insist that every significant subsidiary of a large company is audited by a separate and different auditor (any and all 'special investment vehicles' should be considered such a subsidiary). However auditing will become far far more expensive - but this is a price worth paying to prevent the abuses that allowed the World's financial institutions to create such a disaster.

It might be worth trying what auditing was all about the open public verbal challenging and justification of the accounts and systems of a company - that is the auditing professional and the company management should conduct all conversations and discussion about the accounts in public and the details of all discussions should be made public and open to all in the form of verbatim records. There should be no place private discussions between auditors and company management!

Of course all companies may leave the UK under these circumstances!!! But some diluted sub-set of these proposals should be considered. PS where is the new Companies Act?

75. At 10:16pm on 12 Feb 2011, leftie wrote:

There's an highly misleading element here.

One reason why rpi inflation is currently running above the cpi levels is that their rate above BoE's variable rate that banks are insisting upon for NEW mortgages is greater now than at any time for several decades. It's worth pointing out that the overwhelming majority of mortgage payers DO NOT pay those current interest rates. Or anything like them.

.................

No NO NO! No wonder the lefties got the UK in such a mess.

The reason that RPI is higher than CPI is that it is different to CPI as it measures different things to CPI.

The CPI is carefully and cleverly put together as the most cunning measurement and deception ever applied against the better interests of the people of the UK.

Largely it is measuring price creeping UK supermarket and retail industry ... and 2-3% inflation every year over time mounts up imemnseley over 10 - 20 years ... devaluing the £GBP sterling ... until the 1950's there were 4 US dollars to the GBP £!

By carefully stage managing UK inflation with cartel price creep CPI inflation stats every year ... successive govts con the general public that things ain't so bad because it is only 2-3% every year ... this gives the govt. Whitehall mandarins, BOE, spivs, relatives who are hiers of supermarket cartels etc and easier time in racking up UK prices and squeezing the most out of consumers...

CPI is a govt RACKET to con the UK public.

What would be good to look at would be graph showing e.g. UK supermarket profits over say 10 years ... plotted against import volumes and CPI/RPI

RPI is a much better measure of the real UK general price inflation scaenario ... than CPI ... nut neither of these infaltion measures properly includes such items as housing costs.

CPI is managed like GDP by the establishment to con the general populous that things ain't so bad while the establishment and political classes and non doms and vested interests stuff their childrens into private schools with the profits they are making ... and set them up to continue the hedge fund spivving etc.

This is not Tory bashing either - The Champagne socialists during their 13 year stint actually made this CPI and other abuse much worse..

Get with it ... 'CPI' is a very clever con trick ... that allows the BOE to sit their laughing saying that UK inflation is 'low' ... while they pour over their bullet proof gold plated pension statements.

The BOE are doing a very good job for the establishment by holding UK inflation level fairly steady on CPI stats ... but the act is out the bag now ... the game is up ... the economic changes that are occurring are hitting the CPI figures now ... and we should all be very concerned about the lack of govt strategy on these issues.

Successive Chancellors since the 1960's have all warned about the perils of not controlling inflation ... inflation is another demon that must be controlled.

If the Bank of England’s remit was truly counteracting inflation, the discount rate wouldn’t be held at an all time low of 0.5%.


The Bank of England discount rate allows commercial banks to borrow @ 0.5% and lend @ whatever they damn well please.

Maintaining the discount rate @ 0.5% whilst allowing banks to charge 5.0% + on loans, will increase bank profits, which will hopefully counter defaults by debtors. The unintended consequence (or intended if you’re into conspiracy theories) is inflation.

In my view the whole purpose of maintaining the discount rate @ 0.5% is to bring banks back into some semblance of solvency.

As many have posted on this website, someone has to pay for all those loans that will ultimately be defaulted on. And that somebody is you and me.

#76 JFH

While I agree with your synopsis I do not agree recovery will come from the inevitible collapse of the western economies, your history does not account for technological advancement in carriage and trade and this is were I think history counts for nothing. We are not being allowed to willingly devalue because whatever economic contraction results it will not be enough to compete with billions of Chinese working at full tilt. There is no longer the infrastructure nor appetite for manufacturing in the UK but if there was it would be built on foreign labour. We are heading for a very dark place my friend, forget all hope all ye who enter here.

89. North Sea Halibut, I'm afraid you are right in your prediction.

Stephanie, you hit upon the great dilemma for the bank, namely of inflation versus double dip recession. I think the bank has opted for the seemingly correct and moral stance of trying to prevent the latter at the expense of the former. I also agree with you that killing the economy in order to reduce largely imported inflation would not appear to be sensible.

However, I say "seemingly" and "appear" because encouraging individuals and companies who are already over-endebted to borrow more for consumption via the cheap price of money is only prolonging and worsening the eventual crisis. I can understand why they are doing it but it is based on a flawed analysis of the future world economy and our place in it, in my opinion.

During this parliament the world will wake up and realise that it has an acute energy problem which requires a new source of energy to be discovered and harnessed. Failing that, and probably a wise course of action anyway, we need to alter the collective "growth forever" mindset that has prevailed for the last couple of centuries.

Specifically we need to come up with a consensus on how we reverse our population growth and our over-exploitation of soil and water resources and our pollution and depletion of the planet. Mankind needs to become symbiotic with the planet not parasitic as we currently are.

Finance needs to be provided to fund research and development of alternative sources of energy and the rapid practical implementation of such sources. A huge conservation and reduction of usage campaign also needs to be undertaken asap.

The nettle has to be grasped on population and inevitably we will have to move our economy to a more centrally organised core in key areas such as energy, transportation and utilities. More QE should be directed at these key investments not used to buy government iou's and keep an unsustainable housing bubble inflated.

#89. NorthSeaHalibut,
#90. Sage_of_Cromerarrh

You are both of a more pessimistic turn of mind than I am. Your glass half empty is my glass half full!

I do not see that the inevitability of a rise in interest rates will actually completely collapse the UK housing market and its lenders. Indeed my fear is that the housing bubble will not sufficiently deflate because of the London effect* of foreign capital flowing into London and keeping house prices far too high for business to have access to sensibly priced property and workers to affordable accommodation. I also believe that you are being taken in by the banks and being tricked into believing that a fall in house prices will be calamitous - it won't!

*The London effect works above about the £1M mark where most buyers (some non-doms) do not have mortgages but are cash buyers. They buy from old established owners who are supplied with a huge lump of cash (and have no mortgage) so they move away from London and overpay for a very big house in the county in exchange for their very modest house in Central London.

This thread has taken on a very interesting, if somewhat dark, direction.

I undertand JFH's call (#76) for a rapid and fundemental collapse of the present situation. Whilst the changes would be revolutionary I doubt that John's German example would apply to the UK. You have to remember that the underlying assistance to re-build a German economy after WW2 was not as a result of Germany's post-WW1 experience but rather the needs of the Allies to have a stable buffer against the Russians. You also have to consider that what became West Germany also contained the main manufacturing centres and that the state was far more concentrated. Before some people start, this is not an anti-German comment or belittles their own efforts.

In #89 NSH, paints an even darker picture. I don't necessarilly agree that all hope is lost. There are economic actions that Western economies can take such as protectionist policies to help stem the decline.

Unless or until we decide with what we are going to replace the present system then we are merely setting ourselves up to repeat our mistakes. Whilst it is easy to say and far more difficult to do, we need to put money (liquidity and debt) back into its box as the oil rather than driver of economic activity. We need to focus our economic activity on the creation of value (productive, consumer and social) as the harbinger of true wealth. In so doing we re-balance the dynamic tension between labour, government and wealth (rather than capital).

Thank you Stephanie, you are on the money here.
I believe that the truth is that the current setup of Bank of England "independence" and so called CPI inflation targeting is actually not fit for purpose. The structure does not work. The suspicion is that the bank produces inflation forecasts which are intended to support its own predetermined convenient view on policy. It responds to inflationary pressures by arguing that they are "one-offs" to keep interest rates low to support the government, pressure groups such as the BCC or fears of the effect of interest rate hikes on the property market. These tired old reasons are always rolled out for keeping interest rates low but never the simple uncomfortable economic arguments for raising. Low interest rates are seen as "benign" and high rates as "damaging". It is not symmetrical.

Political control was better - because it at least made the government accountable for inflation and the economy as a whole. Now we have a situation where the Bank of England can take the flak for not having the guts to take the hard decision to raise interest rates but there is no political fallout.

Mervyn Kind should be sacked - George Osborne is incompetent as a Chancellor as he is culpable in allowing this rotten state of affairs to persist.

Interesting developments in Greece over the weekend.

Giorgos Pelatolis, a Greek government spokesman said of the IMF/ECB administrators headed by Poul Thomson, "We have needs, but we also have limits. And we do not negotiate the limits of our dignity with anyone, we take orders only from the Greek people."

It appears that Papandreou, the Greek Prime Minister, had a telephone call with Strauss-Khan (Head of IMF) wherein he objected to the IMF/ECB administrators acting beyond their remit and making demands without reference to the Greek government. As this scenario is about to be played-out in Ireland in the near future and maybe in Portugal, Spain and Italy are we seeing the first signs of governments starting to flex their muscles with their supposed financial overlords?

In the country of the blind, the one-eyed man is M.King.. all the complete confusion among the posters here as to the likely economic outcomes of BoE policy doesnt alter the one sad truth -that the rising price inflation (imported money supply inflation) cannot always be passed onto consumers because they cannot be made to consume things that they dont want to consume..hence the end result will always be deflation in the long term. We are about to enter(although it doesnt seem like it at first) with the help of the USA, a protracted period of deflation irrespective of interest rate movements.

@ 81

The base rate was changed like this -

Thu, 05 Mar 2009 0.50
Thu, 05 Feb 2009 1.00
Thu, 08 Jan 2009 1.50
Thu, 04 Dec 2008 2.00
Thu, 06 Nov 2008 3.00
Wed, 08 Oct 2008 4.50
Thu, 10 Apr 2008 5.00

In reverse order from the BoE website -

In June 2008 the price of oil reached $138 (West Texas Crude)

So I'm fairly sure I've got my dates right.

95. At 11:17pm on 13 Feb 2011, rifra
We are about to enter(although it doesnt seem like it at first) with the help of the USA, a protracted period of deflation irrespective of interest rate movements


Agreed 100%. That's 2 in one blog. Deep joy.