In his analysis of recent inflation figures. His ditto-heads, below, all expect to see massive price hikes and can’t understand why it will come down again. (A lot of the right wing blogosphere actively fantasizes about 1980, I am sure). They should google “base effects”. As Daniel Pimlott of the FT points out:
the sharp increase in inflation has more to do with the plummeting price of petrol a year ago at the height of the financial crisis rather than unexpected price rises last month. Although petrol prices rose by a relatively modest three pence a litre last month to £1.08, the year before – at the height of the economic crisis – petrol prices fell by 9p to 95p. The comparison with generally lower fuel and lubricants costs a year ago added 0.5 percentage points to the CPI over the month.
This sort of basic maths is clearly beyond the Daily Mail, who are redefining the word “surge”. It is beyond the ability of the ditto heads beneath John Redwood’s blog. But he, as a bright man, and leading contender from a very short shortlist to be the best (very) right-leaning economics commentator on the web, ought to know better. And a bright man like him ought to know what soaring inflation in the UK really looks like. After all, he was in power the last time it really happened.
UPDATE: If he wants to know about Galactic hyperinflation, this post from Marginal Revolution tells us.
From the same FT story, “JPMorgan is predicting that inflation will hit a peak of 3.5 per cent in January, before slipping back to experience an extended period under 2 per cent that could last until mid-2011”. This is undoubtedly to do with the output gap that is expected to persist. But there ARE two risks. The first is unconnected to this month’s ‘surge’. One is that the output gap is not as big as people think. That would be very poor news. As Seeking Alpha observe, some basic causes of inflation have been awakening – input prices for manufacturers, for example.
The other major problem , as Simon Ward of Henderson puts it on his must-read-for-money blog, is that “there is a risk that sharply higher headline rates will destabilise inflationary expectations in the absence of any policy response. With fiscal plans widely judged to lack credibility, the UK can ill afford any loss of confidence in the Bank’s inflation-fighting determination.” Even though the surge is largely a statistical artifact, lots of Redwood-Mail headlines won’t help here.
We would be in the worst of all worlds if we started hitting inflationary speed bumps with the economy so depressed. I would be amazed if it happened. The idea that we might have to exit Quantitative easing with unemployment still due to hit 3 million (post fiscal austerity) is scary, and improbable: surely, with those levels of idle capacity, noone can be under much pressure to jack up prices or wages?
On the subject of exit strategies, the excellent Krishna Gua has a discussion of the Fed’s options.
And George Trefgarne maintains a longrunning argument with Congdon about the dangers of QE, in the FT’s letters section:
“[Soaring assets don’t feature in the money supply] But surely the point is that they could very easily be monetised at which point the money supply would accelerate sharply indeed. They are therefore early indications of the inflationary risks that QE is building up in the system. QE has been used in the past – in 1797, 1825 and 1914 – and on two occasions it did indeed lead to inflation”
I am trying to work this out. Money is printed. It is used to buy assets, not spend. Inflation remains weak. Asset prices are high: the total stock of wealth soars. Then, suddenly, the assets are monetized, and we get massive inflation. Presumeably, when the assets are monetized, banks lend against them: because if one party uses money to buy assets from another party, no extra money is being produced? Help me out here.