Labour Has Unleashed the Demon Once Again
UK Inflation Jumps to 17 Month High, says the Daily Telegraph.
UK Inflation hits 17 Month High, says the BBC.
Try 19 year high actually.
The Retail Prices Index (RPI) is now at 5.3 percent, up from 4.4 percent. Economists had expected it to rise “only” to 4.9 percent. The Telegraph and the BBC are following the government steer to concentrate on the CPI instead of the RPI. (The CPI, you will remember, was introduced by the Labour government to massage inflation figures downward.)
Even on the RPI, the BBC nonchalantly says the rise was created by “base effects” because a fall in mortgage rates that happened last year was not repeated this year. So that fall dropped out of the figure, and the rate went up.
In other words, underlying inflation is actually roaring away at 5.3 percent but until now that has been masked by a mortgage rate reduction this time last year.
5.3 percent and rising is an alarming figure. Or it should be.
But nobody yet seems to be alarmed. Mervyn King says it’s a “blip” and inflation will soon fall back to 2 percent.
We should be crystal clear about what is happening here. The last government pumped additional money into the economy in a desperate attempt to stave off a depression (or a desperate attempt to win the election, depending on how charitable you are feeling towards them). Their £175 billion “Quantitative Easing” program, accompanied by a similar amount of government borrowing in a single year, stoked money into the furnace. The big drop in the value of Sterling, together with interest rates held at historically low levels, put a match to the money pile.
And now the inflation demon is rising from the flames. Mark my words, we will all be feeling the draught from its wings very soon. In fact, anyone who shops in a supermarket will already have seen prices starting to rise.
History shows that once this inflation demon is unleashed, it is extremely difficult to put it back down again. The only way to do it is to whack up interest rates. Whacking up interest rates means mortgage misery for millions, it means expensive borrowing for business, and it means more taxes, since the biggest borrower of all is the government itself, and the government too has to pay interest on its debts.
Right now the Bank of England is ignoring the issue and hopng it will go away. Mervyn King reckons temporary factors are “masking the downward pressure on inflation” from the recession. That is fatuous nonsense – it is clear from Britain’s history over the last few decades that there is no economic reason why you can’t have recession and inflation at the same time.
In a year’s time, the Bank will be regretting its idleness, and reacting too late with sharp rises in rates. (Mervyn King, his complacent predictions having been completely discredited, will no longer be in charge of course.)
Labour really have taken us back to the dark days of the 1970s.