If Mervyn King and his team are trying to deal with Britain’s debt crisis by letting
inflation rip, I do wish they would just say so – rather than go through this monthly farce. Yet again, base rates have been left at an absurd "https://twitter.com/SkyNewsBreak/status/25522552491216897">0.5 per cent, in an economy expected to grow by a full 2 percent this year but with inflation at 3.3 percent or 4.8 percent depending
on how you measure it. Petrol prices are bad, but now they are matched with soaring prices elsewhere – from train travel to groceries. Here’s a list of some price rises confronting shoppers:
Add Osborne’s VAT rise to non-food items and we will see CPI inflation soon at 4 percent, twice the Bank of England’s much ignored target.
Here’s what puzzles me. There is a theory in the City that King has decided to allow inflation to soar, judging that the greater risk to the economy is jacking up interest rates. And that he wants
to do this on the sly, trying to keep the cost of borrowing low by making out that the inflation is a blip. But to do so, he’d need to change the remit of the MPC. How can they all turn a blind eye
to the very inflation they are paid to tame?
A couple of weeks ago an MPC member, Andrew Sentance, spoke out about this. I will leave CoffeeHousers with his words:
"Some people say we should ignore rises in inflation driven by developments overseas. That could make sense if higher inflation is purely temporary. But inflation has been above
its 2% target for almost all the time I have been on the MPC, for four years now, and rising energy and food costs are particularly worrying for people on low incomes.
Raising interest rates could benefit the economy in other ways. It would help to protect savers from the effects of higher inflation by raising the return on their savings deposits and it
would provide an important warning signal that the Bank of England is not prepared to tolerate excessive price increases, heading off the risk that high inflation sets off a wage price
If we delay too long raising the official interest rate and inflation is to be a problem, we risk much sharper rises in the future. In my opinion, that poses a bigger threat to confidence
and to the recovery than starting to raise interest rates gradually now."
Amen to all that. King and his gang are failing to tame inflation – and, worse, being seen to fail by the public and the market. No other major Western economy (other than Greece) is having
inflation problems right now. The inflation we suffer is a problem made in Threadneedle St.
UPDATE: Dan Hannan’s take, "Has Mervyn King learned nothing?"Tags: Bank of England, City of London, Debt, Economy, Inflation, Mervyn King, Recovery, UK politics, Vat