Tuesday, September 13, 2011
Inflation at 4.5% - and the case for a new monetary stimulus
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Inflation rose on both measures last month, from 4.4% to 4.5% on the consumer prices index and 5% to 5.2% on the retail prices index. The figures were more or less in line with expectations. More here.

According to the Office for National Statistics: "The main upward pressures to annual inflation came from clothing, fuels & lubricants, furniture & household goods and domestic heating. The main downward pressure to annual inflation came from transport services, particularly passenger transport by air, sea and rail." Though inflation is not yet at a peak, it feels close to it, emboldening some members of the Bank of England's monetary policy committee.

Adam Posen, in a speech at Wotton-under-Edge, Gloucestershire (he gets all the glamorous gigs) made the case both for additional quantitative easing and for other intervention by the authorities.

He said: "Make no mistake, the right thing to do right now is for the Bank of England and the other G7 central banks to engage in further monetary stimulus. If anything, it is past time for us to do so. The economic outlook has turned out to be as grim as forecasts based on historical evidence predicted it would be, given the nature of the recession, the fiscal consolidations underway, and the simultaneity of similar problems across the Western world. Sustained high inflation is not a threat in such an environment, and in fact the inflation that we have suffered due to temporary factors in the UK is about to peak."

And also argued this, in line with some of my recent suggestions: "I would suggest that the Government set up two new public institutions to address the investment gap by increasing the availability of credit to SMEs and to new firms.25 One would be a public bank or authority for lending to small business, as already exists in many other countries (and thus can readily be designed in compliance with EU state aid rules). The Small Business Administration in the US and the Kreditanstalt fuer Wiederaufbau in Germany are two examples of the various forms this could take. The many recently unemployed lending officers from British banks, particularly from branches outside of the City of London, provide a ready skilled labour pool with which to staff such an institution ...

"The other institution I would encourage the Government to set up would be an entity to bundle and securitize loans made to SMEs. Essentially, we need a good version of Fannie Mae and Freddie Mac to create a more liquid and deep market for illiquid securities which can then be sold off of bank(s) balance sheets."

Agree with it or not, it is a very good speech. Available here.