Inflation has been the least of the Government's worries of late but once again it is rearing its ugy head with the prospect of stagflation and a second dip recession. All problems I have warned about before.
The CPI rose to 2.9% in December from 1.9% in November, the biggest monthly rise in the annual index since records began and more than expectations for an increase to 2.6%.
RPI, including mortgage payments went to 2.4% from 0.3%. It was negative a few months ago.
The underlying rate of RPI soared to 3.8% from 2.7% over the same period.
I think that I was previously overly optimistic about avoiding the risk of hyperinflation but if nothing is done we could well be back in the realms of double digit inflation
We are seeing the impact of loose money and it is quicker and worse than expected. This makes a tightening of monetary policy more important than ever, but the trick will be to do it in a way in which economic growth can also be encouraged. This is a difficult but not impossible circle to square.
Hardly surprising Barry after a period of 'quantitative easing' i.e. printing money to pump into the economy. Mugabe did the same!
Funded by public borrowing, this has now left every man , woman and child with a debt of over £30,000!
Next month the new VAT rate should be reflected in the figures which will be even worse.
The fun should start shortly with the usual rounds of pay negotiations since the RPI is used as the base for most of them. Last year with RPI negative from March to October it was easy for Government to impose small or even zero wage increases. This year, with RPI edging upwards towards God knows where, I can not see the Unions being so compliant!
It's beginning to look like a re-run of the seventies. Limited energy supplies and a booming China should lead to increasing oil prices (crude has doubled in price over the past 12 months and now stands at 77$) which combined with excessive growth of money supply has all the makings of a perfect storm of a wage-price spiral.
Howard - sorry mate but the dynamics of QE means that the worse is yet to come. We have just had the highest ever one month inflation figure and this is just the start of the rise. The normal response to this would be to increase interest rates but the economy cannot stand that because it is too weak. If the UK is downgrade then the cost of Government borrowing will rise, more QE, and we will be firmly on a spiral that could lead back to where Labour had us before in the mid-late 70's, 29% inflation in one year or even more. In other words a pensioner on a fixed income annuity of £3,000 per annum will see the purchasing power fall to £2000 in 12 months and by the time that was controlled their annuity could be utterly worthless.
Bob is right, we could well be heading for a 'perfect storm' and the evil of stagflation.
I was previously more optimistic about the effect of QE on inflation, thinking that much of the inflationary pressure would be mopped up by the weak economy countering the problem of deflation. I am more worried now because these figures are higher and faster than expected but also because of the attitude I encountered from David Blanchflower last week, (see my blog) and his dismissive attitude towards evidence contrary to his case for QE.
BarryW, how long have you been into politics mate, and what started you off? Despite my lack of interest in politics, I am still an avid reader of your postings, but like my interests in the physics of the universe, I still can`t get my head round some of it.
Just before Barryw tells you why he got into politics
(if he does) Would anyone like to know what got me into politics 27 years ago, very strange route,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
Colin, I got involved helping out in the October 1974 election as a result of some late night drinking in the Conservative Club, then in Castle Hill House. Originally I had just a vague interest, read Milton Friedman's superb book Free to Choose and Hayak's The Road to Serfdom plus, from the other side, Marx' Communist Manifesto (that one was so illogical it confirmed me in my view as a fiscal and social Conservative). As a financial professional I am heavily involved in financial matters and must be on top of what is happening with the economy.
I try not to get too technical in the blogs and economic commentary buit if there is anything that I dont make clear please let me know and I can clarify.
Barryw
An interesting past, for those of you that may want to know, heres how i got involved.
Coming from a family background where my dad(sadly no longer with us)being a leading trade unionist for the post office union, and always standing for the Labour party in the then, Barton ward at that time one of the safest tory seats in Dover and knowing he wouldnt win, but adament to give the tories a run evey election.
He told me I would never make a cllr(after 25 years being a cllr he was probably right lol)
Before getting into politics all those years ago, I was disgusted at that time that the tories with little justification gassing badgers.
So upset I wrote to all 3 major parties asking them there views on the gassing and would they stop it.
The tories pointed out the scientist view on what badgers were supposed to carry, yet other scientists stated this could be carried by domestic cats, dogs, cows, yet they were not gassed.
The lib dems
said yes but no (the usual i agree but not changing it)
The labour party invited me into an open free vote debate where every member
present supported the view that gassing badgers should stop immediatly.
obviously that was great to hear, but what impressed me more was they put themselves out to let me listen to the debate.
I did soon after join the party, and the rest is history.
Could I even up my view so as to show my unbias
when labour was in opposition Elliot Morley (then fighting against animal cruelty) had a meeting at webbs hotel(remember that place)
he clearly said when (if)labour got into govt the cruelty to badgers would stop, sadly the killing of badgers continued under a labour govt, i sent a letter to E Morley disgusted with his turn around.
Many thanks BarryW, (and Keith). Always interesting what starts people off in anything that interests them in life. So far, I`ve only read Freud and Jung, but nothing`s happened to me yet,(lol). I`ve always found I can read most things, (non-fiction), even if it`s something I know nothing about. I suppose it`s why I find this forum so stimulating, even if I can`t involve myself in some topics, all makes good reading. I read them all.
I had to read Friedman's nonsense for A Level. The theory of a market driven economy is all well in theory - as is pure Communism - but flawed in so many ways that it ignores real life - just like pure Communism. Given the choice between free economy and State intervention, I'd plump for the former every time, but Friedman (and Keynes) both conveniently forget uncomfortable truths, which is why our nation owes so much money.
You can argue the toss between left and right, red and blue, call it what you will, but I've always felt, and still do to this day, that our country would be so much the better for consensus on politics and economics rather than everyone insisting that they are right and refusing to accept that their opponent may have merit in their ways.
Andy - you are lumping in Friedman and Keynes together, it is an excessive adherence to Keynes' approach, to the extent that it get perverted, that screws up the economy and leads to to the present predicament.
Friedman of course gained his name from being the saviour of at least two South American economies and was one of the key economic thinkers that informed Keith Joseph. He of course was not original, his approach was based on Hayak who himself had a grounding in Adam Smith. Therefore 'Friedman economics' has a much longer pedigree than Keynes.
Much of what we may call 'Brown economics' is based on a misinterpretation of Keynes, to be fair. Labour love Keynes because it gives them an excuse for economic intervention and excessive spending, but they take it too far and do not know when to stop. The antidote to Labour spending sprees is a dose of Friedmanite economics, but I have to say that even those like I, who are fans of the Friedman approach do accept that there is a case for some well judged increased borrowing in a downturn provided you pay it back in the subsequent upturn.
Labour currently in using Keynes to justify their economics are conveniently ignoring the already excessive borrowing we had at the start of the downturn.
I have my well thumbed copies of Friedman and Hayak here in my office!
I thought my post might generate a response, Barry! Nonsense is, after all, hardly an adjective suitable for one of the greatest economists ever - but my point was more an illustration that too much, far too much, emphasis is given to economics from a text book. What is needed in the UK above all else is a change of government, but second to that is a greater degree of trying to do what is best for the country and abandoning this dogma of the party in power's beliefs being correct at all times and in all contexts.
It is OK to disagree with party colleagues on any given subject, and that is something that has been forgotten. I agree with you when you describe 'Brown economics' as being (largely) a misinterpretation of Keynesian doctrine, but it's not a million miles from much in the Tory think tank. Sadly, the fact that the two major parties are closer in economic theory than many believe is overshadowed by a fundamental difference in how the economy is managed; an example of that is that I believe a Tory government would have handled the banking crisis far better than Labour because more stringent economics would have been applied to banks that necessity has forced the government to bale out. I don't believe that the bonus culture would have been permitted until every penny forked out to Northern Rock, Lloyds and RBS had been repaid, more along the American lines; however that's conjecture and speculation. What is fact is that adherence to rigid economic theorem undermines an economy that fluctuates constantly, and its time that the major players acknowledged that and bought it into practice.
PSBR is out of control and we, the tax payer, are suffering as a result with all these cutbacks in public services - even here in Dover with our toilets being shut!
Howard - they were a bit too clever to be mere presidents or prime ministers.
Andy - first of all I disagree in that there is the world of difference between Labour and Conservative economic policy. I do, however, agree that too close an adherance to theory can be a problem as the real world does not always conform. This is where the Conservatives have an advantage in economics despite the accusations made against Mrs T in her time. Even she, despite what some claimed, was not dogmatic about sticking to monetarism and that, I believe was what allowed Lawson to shadow the DMark leading to the problems at the end of her premiership/EMU and the subsequent ejection. If she was a bit more dogfmatic maybe that little problem would not have occurred !!!
I have always favoured Mr Micawbers views on economics
Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.
Charles Dickens (1812 - 1870), David Copperfield, 1849
Marek
I think therefore I am (not a Tory supporter)
I appreciate you are a loyal Labour Supporter Keith, I wouldn't expect you to change; I was making a comment to Marek about his Mr. Micawber statement about spending and over spending and if you've spent more than you have, misery ensues.
