Monday, January 10, 2011

Do not panic.

Rising prices will not spur an interest rate hike

"The Bank of England's interest rate-setters are increasingly under fire as they continue to sit on their hands in spite of the rising prices that it is their job to control. Inflation in the UK was 3.3% in November, well above the central scenario of 1.5% the Bank had predicted a year earlier."

Posted by sibley's b'stard child @ 11:58 AM (1337 views)
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2 thoughts on “Do not panic.

  • Never forget that the best response of a central bank to a deflationary scenario is to credibly create a popular belief in the desired inflation level, because this is self-fulfilling. They know UK broad money is contracting, that inflation occurs typically two or three years on so we are currently within the inflation of the wild lending at the height of the boom.

    Maybe the BOE can swing it, maybe they can’t, but their most important weapon is public expectation not interest rates. Whenever they wheel out one of the members to comment, or manage the farce of one of these articles(which I invariably read, my favourites), I feel like saying please stop, because it has no relevance to reality unless their pronouncements gain traction with the public. The public are facing unemployment and falling house prices. Inflation is not simply too much money, it is too much money -chasing too few goods-, and that is not happening. Look at the sales figures for Christmas, handily disguised by snow, is that evidence of a crazed desire to spend pushing up prices?

    The saddest point for the UK is that rate rises are not likely to be because of something as necessary as the real rate rising because of an “investment boom” (in a country with currently over 50% appropriation by the government that is ridiculous), but more likely because increasingly the only people prepared to back the ever risky flop of the UK are pure gamblers taking a chance against default, who need a chance to win.

    Also, the VAT rise is NOT inflationary. VAT is the government share of income. Its absolutely nothing to do with inflation. The underlying price does not change with taxation.

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  • @ stillthinking,
    Thanks for the post. On the face of it, just how good are the people on the MPC who got it wrong? They reckoned inflation at 1.5% ! More likely 3.8% CPI by Easter.

    The MPC will do just as they wish, with a bit of smoke and mirror economics to make decisions appear savvy. I’d like to see IRs up to 1.25% by Easter.

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