Inflation is not going away, whatever the MPC says
If the MPC really thinks that inflation will come down by itself, why don’t we save some money and give its members a year off. That was my first flippant response to yet another above target and into letter writing territory inflation figure of 3.3% for November. The continuing message from the Bank of England and its Monetary Policy Committee on stubbornly high inflation is that it will eventually fall. The problem is that in the eyes of many, there doesn’t appear to be a great deal of evidence that this will actually happen, beyond some wishful thinking on the MPC’s part. My view, and one that I reiterated through the brief foray into RPI deflation, is that the inflation issue is not going to simply drift away in the UK. After importing low inflation from 2000 onwards, as we gorged on cheap goods from Asia and elsewhere – back when supermarkets competed to sell you the cheapest t-shirt, we are now importing higher prices. The long-term picture is that the growing consumer economies in Asia and South America are bumping up prices. Speak to the emerging market fund managers really worth their salt – ie the ones who actually bother to visit and really find out about the countries they invest in – and they tell you that the real story in these countries is not their export power, their commodity riches, or even their appreciating currencies. Instead, they talk about the growth of the consumer, the subtle or dramatic shift in way of life that reflects the late 1950s and 1960s boom in the West, as entire nations moved from mangles and larders, to washing machines and fridges. This means more competition for food, fuel and natural resources, and demands for higher wages. It also means we aren’t going back to those heady golden days when stuff just seemed to keep getting cheaper. The MPC is stuck between a rock and a hard place. Inflation is stubbornly above the 2% target, but it knows that the UK narrowly dodged a US-style house price crash bullet by cutting the base rate to the bone swiftly and taking mortgage payments down with it. Raise rates by much and the people still struggling even when they are paying less than 4% on the mortgage will be in real trouble. Add into this, the MPC’s belief that the soon to arrive cuts are worth a rate rise or three in terms of effect, and the difficulty in using interest rates to control imported inflation and I can’t see much beyond a token rate rise on the horizon. And the MPC has been paving the way with excuses for a long time now. The latest soon to arrive excuse is the impending VAT rise: this should buy at least six months of maintaining the figures are distorted. After that, perhaps a new CPI measure could fudge the issue for a while and then who knows. In the meantime, we all know the cost of everyday essentials from food, to energy bills and petrol and now even clothing, is rising faster than our wages and our savings. I’m not sure what the answer to the problem is. Maybe in the current context a 2% inflation target is actually too low, after all inflation at 3% is hardly that high. Perhaps the MPC is right and inflation will come off the boil eventually. The one thing I do know is that I wouldn’t rely on the MPC to deal with inflation for you – you’ll have to try and beat it yourself.
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