Inflation and the rise of poverty...

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Amidst all the hand-wringing about poverty and the castigation of the current government for having the audacity to reform the benefits system there is a consistent theme. For sure the typical poverty pundit starts with talk of austerity, with frowny conjecture about changes to benefits and with a side swipe or two at bankers, rich tax dodgers and big business. But then we get this:

...and the extraordinary rise in British food prices – up by 40% since 2005, according to Oxfam – have pushed them into hunger.

And this:

The collapse in living standards means that those who once lived comfortably now worry about filling their cars and those who once scraped by worry about filling their bellies.

The writer (in a depressingly inaccurate and effortlessly polemical way) isn't talking about the actions of government but about inflation. The inflation that means it cost me over £70 to fill the tank of my car the other day. The inflation that has seen the price of some basic foods - bread, for example - nearly double.

Yet our masters - the grand old men in the Bank of England, the 'oh-so-clever' mandarins in the Treasury and the great and good of international finance - tell us there is no inflation. That the problem is quite the opposite - deflation. And while they're saying this (and while the UK's inflation rate continues to be above the target rate month after month eating away at savings, punishing folk on low or fixed incomes) there are queues at the food banks. Queues caused by the Bank's fixation on the deflation that simply isn't there not on the inflation that is.

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The Bank of England carries on with its strategy of robbing my savings...

UK inflation has been above trend for over two years - we had one brief, nay fleeting, moment of negative inflation but otherwise there has been no sign of the economy collapsing into a terrible deflationary spiral. And, you've guessed it folks, there never was a real risk of deflation.

Today - with rocketing inflation as a result of quantitative easing and other lunacies - the Bank of England carried on with its anti-debt strategy of inflating our way out of the problem. Also known as robbing the savings of prudent folk to pay for the debts of the irresponsible - and nothing was more irresponsible than the last Labour government.

We won't know the Bank's justification for this action until the minutes of the Monetary Policy Committee are published later this month. But we can guess that some mealy-mouthed words about 'not risking the recovery' will feature. Indeed, the interests of big business are uppermost in the Bank's deliberations - as is clear from the British Chambers of Commerce's response:

"Businesses will welcome the MPC's decision," said BCC chief economist David Kern, who called for any rate rise to be delayed until next year.

"Premature rate increases will have negative effects on growth and jobs. With wage increases remaining subdued, we strongly urge the MPC to hold its nerve and avoid taking any action that may risk derailing the recovery."

In the meantime, the inflation caused by this strategy - boosted by the irresponsible US stimulus and the reaction to britain's QE - is eating into my savings and making it harder for millions of pensioners stuck on a fixed income. Thanks for nothing, Bank of England.

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An Echo of Old Magic and Old Song

A good firm path - dry, with a good surface. Firm, secure fencing. Someone cares for this place - or cares enough to separate me from the woods. Perhaps the steepness of the slope and the looseness of the surface motivates that someone - he or she would rather those passing through didn't slide, tumble and crash into the river below. Or maybe there are beasts in the wood.

I hope there are beasts - or at least the memory of beasts. The wolves, bears and boars who once owned these woods - and the magic folk too. The trolls, the gnomes - and is that flash of white a glimpse of the unicorn. It can't be a wind blown supermarket carrier bag, can it!

On a wild night you must stay even more firmly on this path. Or else suffer the fate of Tam Lin - perhaps without a true love to save you from that mad ride into the gates of Hell.

gloomy was the night
and eerie was the way.
this lady in her green mantle
to miles cross she did go.

with the holy water in her hand
she cast the compass round.
at twelve o'clock the fairy court
came riding o'er the mound.

first came by the black steed
and then came by the brown.
then tam lin on the milk-white steed
with a gold star in his crown.

she's pulled him down into her arms
and let the bridle fall.
the queen of fairies she cried out
young Tam Lin is away.

The darkness is always close by - the legends are part of our heritage. The magic of these places - however safe they're made - is the deep magic of England. Step off the path and into the woods and listen carefully - you may hear the song of our ancestors. A song of woods, of trees and of the security that light and a clear view bring. It is a fine song.

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"La, la, la. Not listening, not listening." The Bank of England and the inflation threat

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It is a while since I’ve commented on the extent to which our economic lords and masters are ignoring the damage that consistent above-trend inflation is doing. However I was prompted by the observation – from this source – that:

Most inflation is being caused by indirect taxation by the state

Now, while it is true that increases in VAT and in duty on fuel, fags and flying affect prices, this is not the full story. Over the past couple of years a range of excuses have been set out for our relatively high inflation rates – upward fluctuations in oil prices, poor grain harvests, bad weather and so on. Yet throughout all this – and even when rates of VAT were reduced temporarily – there was not let up in the rate of inflation exceeding both trend rate and the Bank of England’s forecast rate.

Back in February 2009, the Bank forecast that the inflation rate today would most probably be between 0% and 1%. They reckoned there was a 1-in-4 chance that prices would actually be falling (i.e. the Dreaded Deflation), and the chance of inflation being over 2% was put at well under 1-in-10.

Crank forward to February 2010 (just 9 months ago), and the Bank had nudged up their forecasts a bit - they now said inflation would most likely be between 0.5% and 1.5% by now. But they still thought there was a good chance of lower inflation, and still a 1-in-5 chance of deflation (despite the fact that the printing presses had been running in overdrive for a year).

And now? Well, today's CPI inflation has actually turned out to be over 3%. And even the Bank's own November forecast acknowledges its back on a rising track.

So there you have it, the Bank of England – along with plenty of others - has hitched its wagon to the idea that we face deflation which requires us to have, what are in effect, negative interest rates. And today the Bank confirmed that rates won’t rise. And this is despite a big hike in commodity prices, continuing concerns about food prices and the VAT increase.

While all this is going on the Treasury is jumping up and down on the high street banks asking why they aren’t lending any money.

U.K. Chancellor of the Exchequer George Osborne said Tuesday that the government is in discussions with banks to ensure they make a material and verifiable increase in lending to businesses, especially smaller firms.

So let’s think about this George. The banks aren’t very keen on retail lending at the minute despite the Government having printed plenty of money (alright I know they haven’t actually printed any more notes then usual but shovelling money into the banks’ balance sheets* amounts to the same hill of beans). Now why do you think this is? Why aren’t the banks lending?

Spotted it! Banks aren’t lending because they’re losing money doing so – and, quite understandably, banks are not especially keen on making more losses. All that money (along with the make-believe money from the Government) is sitting snugly in the banks’ virtual vaults waiting for interest rates to rise. And the banks know rates have to rise because inflation can’t be allowed to continue at current levels for much longer.

If the Bank and the Government want to stimulate lending the best way to do that is to raise interest rates. Right now the banks are making plenty of money doing their everyday transaction management and ‘moving money around’ business and see no real point or incentive to encourage risky small business lending. Plus, of course, raising rates would reduce inflationary pressures.

Unless, of course, the Bank and the Treasury are really rather pleased about above trend inflation – what better way to reduce the deficit and control the debt! At the expense of savers, shareholders and those who didn’t behave like Viv Nicholson during the last decade.

*Technically QE isn’t ‘monetising Government debt’ as the Government isn’t buying its own debt. Third parties (banks and so forth) are buying the government’s debt. And the assets bought by the bank with QE are different and separate from this. Or put simply – we give the banks cash and they (and their clients) buy government stocks. This is of course wholly different from ‘Mugabenomics’.

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...And you don't believe inflation is a problem?

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After a month or two of complacency, I’m back to worrying about inflation. Not just because I’m a substantial net saver and inflation is very bad news for me but because the damage it will do to our fragile economy is enormous. Unless, of course, you’re a bank with big, unrevealed debts on your balance sheet or a government with the biggest ever national overspend.

At the moment the Bank of England – by sticking to the received wisdom of neo-Keynesian economics (by which I mean the kind of Keynesian economics that Keynes never proposed) – is playing fast and loose with its reputation. Here’s the Wall Street Journal:

Rising core inflation may indicate firms feel confident enough to be rebuilding margins, which would be at odds with the BOE's insistence on a substantial U.K. output gap. Or it could reflect the continued impact of the 25% devaluation in the trade-weighted value of sterling. Either way, it raises questions about the accuracy of the BOE's inflation model; as Fathom Consulting points out, U.K. GDP is now 12% lower than the BOE forecast in November 2007, while inflation is 2.5 percentage points higher.

Each month the Bank’s excuse is that “temporary factors” are to blame – this time it’s the rise in duty on beer and fags that’s identified as the culprit for a sharp spike in the rate. But most forecasters – presumably using the same factors – were at or around 3.5% rather than the 3.7% of the headline rate. But the Bank still argues that:

“…higher oil prices, a rise in value-added tax to 17.5 percent from 15 percent at the start of the year, and past falls in sterling were driving prices higher, but were only short-term factors that would abate over the coming months. The temporary effects of these factors are masking the downward pressure on inflation from the substantial margin of spare capacity in the economy,”

In other words, we’re still facing deflation rather than inflation. But the Retail Price Index (RPI) has jumped to 5.3% - despite the continuing downward pressure on mortgage rates! The reality – month after month – is that we have never been in a situation of deflation and now we are lurching dangerously towards a possible further acceleration in rates. Maybe this is temporary – I hope it is for sure – but when the Bank doesn’t understand how service industries don’t carry capacity gaps like manufacturers and that the real economy is not sustained by unearned money but by the creation of real added value.

Sadly UK based economists (with notable exceptions) continue to peddle the Bank’s line that inflation will quickly fall back. Fortunately we have the Yanks to keep us straight on these matters!

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