Comments: How the Bank can avoid being blown away

I'm not an economist, but I did work through the period of high inflation in the 1970s and 80s. Apart from Ted Heath's mad scheme to link wage increases recalculated every month to prices ~1974, my recollection is that inflation was linked to wasteful government spending.

I recall that Margaret Thatcher reduced the number of civil servants by ~500,000 - approximately the same as the increase under Blair/Brown - and my memory associates the reduction in inflation with her tighter controls.

I've also read that the broader money supply number is increasing by 14% annually in the UK, apparently higher than anywhere in the developed world.

Is it possible that these two factors - massive wasteful increases in government spending and increasing money supply - are the real causes of higher inflation? And if it is, who is really responsible - Eddie George or Gordon Brown?

Posted by Tony Green at January 21, 2007 10:10 AM

I just googled an Independent article from October 23 indicating the startling increase in the August money supply of 14%. While we can measure and spend a great deal of time lamenting the consequences of inflation in there various statistics, I believe it's excess money supply growth that plays the most important role. Debase the currency at your own risk.

Posted by Gary Bezowsky at January 21, 2007 03:59 PM

Hello all,

I do not disagree wth anything mentioned in the article, other than the grave omittance of an indesputable fact. Last year the MPC caved in to public and political pressure to reduce rates.....and they did!....In doing so they signalled two facts.
1. our primary commitment to protect a monetary equilibrium is not only based on facts and relevant economic knowledge, we are open to suggestions of the press and other interested parties be it political or otherwise.

2. Inflation is not the be all end all, we have the power to influence the markets and public with impunity.

In summary, the PR exercise now is hopefully not too little too late!

My greatest respect is reserved for Mr King who has been consistent with reality and was dissapointedly outvoted on the interest rate cut last year. (just for the record)

Regards to all,

Arik Schickendantz

Posted by Arik Schickendantz at January 21, 2007 05:48 PM

M4 has been a very poor predictor of inflation in Britain and there are reasons to suppose recent figures are distorted. We shouldn't ignore it, but we shouldn't make too much of it either. By the way, M4 growth has coe down a little over the past couple of months. Here's a copy of a comment I recently posted on this:

"The rise in M4 has been extensively debated, including on this site. Is the rise in M4 caused by a surge in consumer borrowing/mortgage lending? No, that has shown no acceleration. What it is caused by is a sharp rise in lending to other financial institutions. That's partly caused by private equity and hedge fund activity but may also reflect some technical distortions. As you will know if you read the site, several members of the shadow MPC are keen followers of M4 and believe in its predictive power. But the OECD has just published some research saying its links to general inflation have broken down in recent years:
http://www.oecd.org/dataoecd/55/11/37861149.pdf

Posted by David Smith at January 21, 2007 07:13 PM

PS The point about wasteful government spending is well made. Eddie George, however, has been gone from the Bank for well over three years now.

Posted by David Smith at January 21, 2007 07:15 PM

Yep, that August rate cut is starting to look like a big mistake now! 6.0% here we come. Have you seen the LIBOR recently???

Posted by Yoshi at January 21, 2007 11:07 PM

I read somewhere that pressure is being created elsewhere when inflation juggling by the BOE results in higher interest rates.Inflation increments usually mean that the pound is losing value and therefore should lose value in the currency mart.

When the pound is losing value by 10-12% as m3 or m4 suggests,it helps the pound in that America is fiscally deficient ie trade deficits and the like,and the pound will only lose value once and if the deficit in America becomes manageable

Posted by Hitesh Damani at January 22, 2007 02:19 PM

I can't help but feel the Bank is making rather a mountain out of a molehill. I think the real danger lies, not in inflation creeping up to 3-4%, but the possibility of a substantial fall in UK housing prices. It is true UK house prices continue to buck pessimistic predictions but if interest rates were to rise anothe 0.5% or so, maybe this would be sufficient to change the confidence of the housing market into pessimism and a slump in house prices. I feel that falling house prices could be as devastating on the UK economy as they were in Japan in the 1990s. It is interesting you quote the example of Japan, because I think that is a good example of a country where they gave far too much importance to the benefits of low inflation.

Posted by Richard at January 22, 2007 04:17 PM

Not a landlord by any chance are we, Richard? Interest rates up, house prices down. Good. A recession? Even better - it's overdue, and inevitable. Let's get it out the way and get back to sustainable real wealth creation instead of debt-leveraged financial speculation and bloated public sector job creation masquerading as a successful economy.

For the majority of people, who keep their jobs, recessions are raher good. It's unfortunate for those who do lose their jobs, but also unavoidable - our system of unfettered credit creation can do nothing but lead to boom and bust, time after time.

Regarding inflation, try telling a group of pensioners that it's not important. A very naive view. Inflation is evil and I'd rather take 1990s Japan over 1970s Britain any day, thanks.

Posted by Yogi at January 23, 2007 09:19 AM

Yogi,

The problem is that higher interest rates don't affect the public sector directly. It is the real wealth creators, especially those that have to compete overseas or against overseas suppliers, that suffer most, and first, when interest rates go up.

Higher interest rates will nor rebalance the economy towards wealth creation. Only a reduction in public sector spending and lower taxes can do that.

Posted by HJ at January 24, 2007 10:04 AM

Inflation is a lie, raise them rates and bring house prices back down to normal levels. Tighten credit, and then maybe just maybe this countries debt problem might start to heal itself.

Posted by Kev M at February 5, 2007 05:37 PM