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It’S Time To Ditch The Bank Of England’S Obsolete Inflation Targets

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Swapping CPI for the productivity norm would increase economic stability and help dramatically reduce booms and busts.... By Allister Heath

Inflation is tantamount to taxation without representation - so said Milton Friedman, and he was right. The state owns the currency; so any decision to allow the internal value of the pound and thus its purchasing power to decline is a tax on people’s assets. Yet it is a levy that is pushed through by stealth; it is hard to work out exactly who gains and who loses, and especially not in advance.

When the Chancellor delivers a Budget or Autumn Statement, the decisions are analysed in minute detail and the distributional impact assessed to the point of boredom. Not so with inflation. The fact that those with large debts are in effect given a handout by savers and those on fixed incomes is rarely discussed.

Prices have risen by 28.2pc since 2005, according to the consumer price index. So a £20 note that fell down the back of a sofa 10 years ago would now be worth just £15.60. A tax of £4.40 has been levied without any real accountability. Of course, the public can protect itself at least in part against expected inflation - companies push up prices, individuals get pay rises, interest rates often contain an inflation risk premium and the value of many assets tends to go up in real terms.

But the Government was nevertheless almost right when it said on Tuesday that the collapse in inflation - down to 0.5pc on the consumer price index - is equivalent to a tax cut. In fact, it is equivalent to a much smaller tax hike - the value of the money in our pocket is falling far less quickly, but it is still falling.

Does that mean that inflation should be zero, or that we should actually want prices to fall as much and as quickly as possible? Perhaps paradoxically, the answer is no. Some forms of deflation are good but others are very bad for the overall economy; and while much of the inflation we have seen in recent years and decades has been of the malign variety, increases in the overall price level can actually be benign and even necessary in certain circumstances. [more at link]

http://www.telegraph.co.uk/finance/economics/11343822/Its-time-to-ditch-the-Bank-of-Englands-obsolete-inflation-targets.html

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Does that mean that inflation should be zero, or that we should actually want prices to fall as much and as quickly as possible? Perhaps paradoxically, the answer is no.

That's his opinion and but perhaps the answer is yes - especially with house prices. Although Japan is often accused of having stagnated and has had regular bouts of deflation for the last 35 years or so at least Japan's GDP per Capita has still been higher on average than the inflationary UK's - and that's despite the UK's massive increase in total debt over that period.

Edited by billybong

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It sounds like the productivity norm system could be a roundabout/underhand way to introduce house prices back into the "system". The way they keep trying to boost house prices means house prices dropping in the UK would be "bad" deflation so interest rates would be held down even if "good" deflation didn't require them to be.

A bit like the current system really.

Edited by billybong

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  • 404 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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