Friday, Apr 18, 2008
Only 3%?
Telegraph: Inflation to top 3pc, says Bank of England chief economist Charles Bean
Inflation is likely to rise above 3pc later this year as a weak pound exacerbates rising commodity prices and labour costs in China pick up, the Bank of England's chief economist has warned. Charles Bean said that the MPC was "walking a tightrope" between attempting to stimulate growth as the credit crunch bites and allowing inflation to take off. Since August, the pound had fallen as much as it did after it crashed out of the European Exchange Rate Mechanism in 1992, boosting exports (err what exports!) but increasing import costs. Using the traditional economists' rule of thumb that a one percentage point fall in sterling is equivalent to a quarter point cut in interest rates, he said the recent fall was equivalent to a three percentage point cut in interest rates.
12 Comments
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1. hpwatcher said...
What he means is that he will do everything that is possible to see that inflation figures will not top 3%.
We all know that REAL inflation will probably get to 8%.
2. bystander said...
Basically Mr Bean is warning that the BoE is determined to continue with its strategy of rate cuts, even though they are having sod all effect on lending rates, but penalising savers and annihilating the pound. If they continue bailing the financials out like this inflation will overshoot their ficticious target by some 10%, then they really will be faced with a problem. My suggestion: no more rate cuts until you see these first, 3, passed on, in full to the borrowers, as they have been to the savers. This should take about six months and then re-assess the credit crisis.
3. planning4acrash said...
Tightrope? Wide highway more like it! They would like to have us think that they have difficult decisions, but bailing out the banks so that b(w)ankers can have their Mazarati's, out of our tax money, is self serving, corrupt and full of choice.
4. Sneaky said...
hpwatcher - "We all know that REAL inflation will probably get to 8%."
You mean you're expecting real inflation to DROP ?? Ha ha.
Since 1997, a short cab ride in London has gone from £6 to £12. Since the early 1980's, an adult London Underground ticket has gone from 20p (in the "Fare's Fair" campaign) to £4. Yeah, yeah, computers have dropped in price, but you can't eat a microchip, and you can't drive a hard drive, so all this rubbish about "Core inflation exclusing food and energy" measures the bit of inflation that has little to do with basic survival.
Just remember folks, inflation is low, price is stable and the economy is strong, as Gordon and George keep telling us.
5. sold 2 rent 1 said...
Here is UK M4 graph.
This graph was made in Feb 2008.
Expect M4 growth to go to 14-16-18pc over the next 6 months after the recent bailout proposals.
We are all about to get extremely poor
6. cornishman said...
That graph is exactly the same shape as the FTSE 250 graph for the same period.
I've no idea if that means anything at all...
Anyone enlighten me?
7. uncle tom said...
Another dodgy graph.. :(
This is, I take it, the money supply growth rate - not overall money supply, and that the figures in the vertical axis are percentages.
If so, there would seem to be some correlation with 'true' inflation. However, I suspect a divergence will signal an economic downturn.
Now, how about a graph (properly annotated please!) - showing M4 growth less RPI over a 30yr timeframe?
8. sold 2 rent 1 said...
UT, you find me one and I will put it in my archive.
9. sold 2 rent 1 said...
cornishman,
Interesting point.
Since 1997 stocks have been broadly correlated with IRs.
Before 1997 stocks were inversely correlated with IR.
Simply put, 1997 marked the point where fear of deflation overtook fear of inflation.
The is all K-cycle theory stuff.
Providing the markets continue to fear deflation over inflation, we should see a bottom in stocks when IRs hit bottom (this summer maybe).
We should also see M4 hit a bottom in growth rates and take off again at roughly the same time
The big question is will we see a turning point where the markets fear inflation over deflation?
Essentially this is the deflation-hyperinflation debate that rages on.
Either way, things are about to get really tough.
IMHO I can't see hyperinflation happening as wages are being held down, and with no wage-price spiral then no hyperinflation.
So for me it is deflation in the end (after an inflation spike).
10. sold 2 rent 1 said...
Cornish,
Here is the 1997 turning point illustrated.
When fear of deflation overcomes fear of inflation
11. cornishman said...
Wages are being held down at the moment by immigrants and the exporting of manufacturing jobs. But with the zloty going from 7 to the pound a few years ago to 4 to the pound now, for example - a lot of those immigrants will want to disappear home again, I would have thought. Also, the cheap imports are not going to be so cheap shortly as Far Eastern prices rise dramatically.
I can't see how wages will be kept down here in the long run. I agree, that they have been up till now, but there is bound to be some lag in people's expectations. Also, a whole generation has forgotten how to be militant. There could well be a winter-of-discontent this year, I reckon. The teachers are already going on strike, for example. The strikes would then snowball as people re-learned how it is done. General wage inflation would then take off as GB will prefer to allow high wage settlements rather than having strikes just before an election/losing his job.
If this coming winter did end up with increased wages, then the outlook next spring would not be good and could precipitate the downturn forecast by the Confidence model you have posted previously - along with increasing inflation.
If the show has to be kept on the road until after the November elections in the US, and then interest rates are whacked up like Volker did in the 80s, then that would also tie in with a downturn next spring.
I suppose, in the end, it will depend how long the inflationary 'spike' goes on for.
12. sold 2 rent 1 said...
cornishman
"the outlook next spring would not be good and could precipitate the downturn forecast by the Confidence model "
I think Martin Armstrong's peak next April may be seen as a dead cat bounce similar to spring/summer 1930 before stocks plunged again.