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Inflation and other First World Problems
Oct. 21st, 2011 03:35 pmGosh, isn’t inflation high. Latest reports put the Retail Price Index at 5.6% and the Consumer Price Index at 5.25.
This compares with the Bank of England’s target of 2%. Not 2% over the medium term, or 2% when we feel like it but 2%.
We’ve had inflation above the Bank’s target since November 2009, getting on for two years. Inflation has been romping along at pretty much twice the target rate since then. We have about 3.5% more cummulative inflation than we should have done over the two year period. Looked at another way, we’ve had enough inflation to last us until May 2013 – a little under two years from now.
The Bank of England express the view that inflation will fall over the next 18 months. They are deliciously vague on when or how much this might be. They are, in any event, usually wrong.
The markets seem to support the view that inflation will fall – on average. However, inflation isn’t going to fall to zero (unless). Average predictions for inflation in 2012 are 2.5%. Still 0.5% above target or 25% more than it should be.
I’m a little less sanguine about inflation than the markets but they probably know better than I do.
At that 2.5% rate cummulative inflation would still be about 5% above what it ought to have been. The lowest annual CPI inflation has been is 1.8%. Taking that slightly below target inflation figure and projecting it into the future cummulative inflation doesn’t return to its target until 2035.
Figures schmigures. What I’m taking from this is that even if high inflation doesn’t become persistent we’ve still got a significant chunk of historic inflation that isn’t going to go away…unless.
Inflation is broadly a transfer of wealth from those who hold money to those who owe money (so long as those who owe money are able to increase their incomes in line with inflation).
With this in mind some of the commentary that suggests that the UK government is quite happy with moderately high inflation might not be too wide of the mark. I’ve read articles that suggest that the UK Treasury and the Bank of England have secretly and tacitly changed the inflation target from 2% to an assumed 5-7%.
It’s worth noting that had we been using the using the CPI to adjust our Gross Domestic Figures instead of the governement’s own measure of inflation for the government the GDP Deflator we would be in a recession right now and that inflation is still twice its target.
What’s the unless? Appalling, abysmal, catastrophic European or global economic failure should destroy enough demand for inflation to be significantly below target enough for us to catch up with our own goal of keeping inflation in hand. Pick your poison. Unless you are able to negotiate better wages you can expect to see you’re standard of living fall either a little broadly spready across the population or a lot but more randomly distributed.
I’m wondering if the government’s Plan B is to inflate away our national debt at the expense of our pensions, savings and standards of living.
This compares with the Bank of England’s target of 2%. Not 2% over the medium term, or 2% when we feel like it but 2%.
We’ve had inflation above the Bank’s target since November 2009, getting on for two years. Inflation has been romping along at pretty much twice the target rate since then. We have about 3.5% more cummulative inflation than we should have done over the two year period. Looked at another way, we’ve had enough inflation to last us until May 2013 – a little under two years from now.
The Bank of England express the view that inflation will fall over the next 18 months. They are deliciously vague on when or how much this might be. They are, in any event, usually wrong.
The markets seem to support the view that inflation will fall – on average. However, inflation isn’t going to fall to zero (unless). Average predictions for inflation in 2012 are 2.5%. Still 0.5% above target or 25% more than it should be.
I’m a little less sanguine about inflation than the markets but they probably know better than I do.
At that 2.5% rate cummulative inflation would still be about 5% above what it ought to have been. The lowest annual CPI inflation has been is 1.8%. Taking that slightly below target inflation figure and projecting it into the future cummulative inflation doesn’t return to its target until 2035.
Figures schmigures. What I’m taking from this is that even if high inflation doesn’t become persistent we’ve still got a significant chunk of historic inflation that isn’t going to go away…unless.
Inflation is broadly a transfer of wealth from those who hold money to those who owe money (so long as those who owe money are able to increase their incomes in line with inflation).
With this in mind some of the commentary that suggests that the UK government is quite happy with moderately high inflation might not be too wide of the mark. I’ve read articles that suggest that the UK Treasury and the Bank of England have secretly and tacitly changed the inflation target from 2% to an assumed 5-7%.
It’s worth noting that had we been using the using the CPI to adjust our Gross Domestic Figures instead of the governement’s own measure of inflation for the government the GDP Deflator we would be in a recession right now and that inflation is still twice its target.
What’s the unless? Appalling, abysmal, catastrophic European or global economic failure should destroy enough demand for inflation to be significantly below target enough for us to catch up with our own goal of keeping inflation in hand. Pick your poison. Unless you are able to negotiate better wages you can expect to see you’re standard of living fall either a little broadly spready across the population or a lot but more randomly distributed.
I’m wondering if the government’s Plan B is to inflate away our national debt at the expense of our pensions, savings and standards of living.
