As the FT has noted this morning:
Britain's inflation rate rose sharply in June, far exceeding expectations and adding to pressure on the Bank of England to take the rise in prices more seriously. Measured by the consumer price index, the annual rate of inflation hit 2.5 per cent in June, rising from a rate of 2.1 per cent in May, the highest since August 2018.
It simply amazes me that people are surprised that if you compare the UK economy in June 2021, when it was reopening after a lockdown, with the UK economy a year ago, when everything possible was being done to suppress demand in the economy, anyone should be surprised that inflation has risen, or that the increase requires much explanation.
More significant is the lack of understanding of what the inflation index shows. All it does is compare the price of a bundle of goods in one month with the price of the same bundle a year ago. People like to say that the price of this or that has changed this month: actually that is of little consequence except in terms of their relative weighting in the bundle. All that really matters is the comparison as a whole. And if there is an external macroeconomic factor to consider, and Covid might just be that, then that is the only issue of consequence to discuss.
In that case, before anyone thinks the Bank of England should now be obsessing about how to control inflation, and begins suggesting whether or not interest rates, QE or other factors should be changed to manage it, they might want to actually consider instead what caused this increase: which was the reaction of people to UK government Covid restrictions. Changing interest rates will not change the prevalence or otherwise of Covid in the economy. It is vaccines, strong social distancing, good ventilation systems and compensation for people who are required to isolate that will change reaction to lockdown policies (and we are a long way from having seen the last lockdown as yet: I suspect there will be another within a month or two and expect at least one more this coming winter).
Epidemiologists have long suggested that until Covid is properly managed there can be no proper economic recovery. There will, instead, be fits and starts, and much economic agony. The evidence for that being the case is compelling. But to, in that case, think that the Bank of England has any answer to the resulting economic situation is absurd. They have not. In that case their only required response to this inflation is to note that the government has a duty to get on top of Covid, as it seems other countries might have done significantly better than us. And thereafter the Bank needs to do nothing with interest rates, QE, or anything else. This inflation is way beyond the reach of any such measure and if the temptation to use them is succumbed to matters can only get very much worse. I am just hoping that with Andy Haldane gone the Bank might have the sense to appreciate that.
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The price of petrol went past 130p /litre (that’s £6/gallon in old money!) in a coordinated fashion across the different supermarkets.
Up from £1.15 back in April.
What are the global conditions to have caused that? Last time I looked there were fully laden tankers parked off the coasts and recently OPEC+ worried about prices going lower and attempting to keep production tight.
I will repeat my assertion that inflation is being introduced by hook or crook through cartel actions to sell the story of increasing the interest rates which would lead to a large number of borrowers – especially these new mortgagees in the last decade not being able to make their monthly payments. It is the same old scam.
See these football madding crowds last week? It is almost as if the populace is being hugely distracted and encouraged to keep fighting between themselves whilst grand larceny in broad daylight is perpetrated – mugs.
You may be right
Beer and circuses are long the distractions provided by those seeking to abuse the populace
The reason for the price rise is most due to issues in OPEC, UAE and Saudi’s having a disagreement:
https://www.gzeromedia.com/viewpoint/why-are-oil-prices-surging-right-now
An interest rate rise now would be disaster for me and many others.
It would not surprise me if they did it and that this is the beginning and not the end of the discussion – it’s all about agnotology after all. I don’t see many people dissenting against it in the ‘politics of inevitability’ that dominates our polity at the moment.
Given the historically very low rates anyone that can’t survive a relatively small increase in rates should not have taken out a variable rate mortgage in the first place. We are talking about rises of just 0.25% or 0.5%, no one is talking about increases if 1% or 2%.
Neil,
If you have a 500k interest only mortgage at 2% and rates go up by 0.5% – that is a 25% increase in your monthly payments.
How many can afford that from their max stretched take home incomes?
The financial illiteracy let alone basic mathematics is part of the great dumbing down. Are you buting ir selling it?
And look at this – the real cost of a low wage depressed economy/society.
When I saw the fracas at Wembley last week the thought did occur to me as to the motivations of those involved:
https://www.theguardian.com/football/2021/jul/13/england-fan-who-stormed-euros-final-defends-his-actions
Let’s be honest – football is about money isn’t it and money is increasingly the measuring stick between the haves and have nots in society. Who is to say that this sort of thing can only get worse?
It is clear that the BOE is under immense pressure from the financial sector to raise interest rates so that there are more opportunities for unearned income for the Tory fat cat donors.
For your info, I was on a fixed rate mortgage that ended in June. My lender for some bizarre reason chose to end it and leave me with a variable rate even though I’ve been with them for 20 years!! I complained and no one was going to give me a 5 month fixed rate!
Why leave me for 5 months at a variable rate?!! Bizarre.
[…] Cross-posted from Tax Research UK […]
The scam on the NHS by pharmaceutical companies increasing the price of an important and life saving drug hydrocortisone by a huge amount is sure to be followed by engineered price rises under Covid. The increase in petrol price when many are using cars because of the likelihood of increased infection on public transport isn’t exactly a surprise. Nor is the use of questionable statistical data to infuence the public.
Larry Elliott points out that the sudden rise in wage rate increase is because poorer paid workers have, under Covid, lost their jobs!
The last is spot on
At least these very low rates are enabling our governments to service their enormous debts – when long-maturity US Treasuries normalise back to their long-run average around 4%, the $30 trillion owed by the US government will be costing them $1.2 trillion a year to service. That’s about a third of their tax revenues, and more than their entire defence budget?
Of course Paul Krugman would argue that debt is just money that we owe to ourselves.
But then so is tax.
That is not the normal rate
The normal rate is steadily declining and below 2% now
And you do know markets don’t set rates, don’t you? And all debt could be cancelled if governments want?
Agreed – markets don’t set rates.
Unless you want someone other than your central bank to buy your debt.
If the new normal on government bonds of long maturity is around 2% now, and the rate of price inflation stays up around 5%, will pension funds have to reduce the amount of them they hold?
Because I’m not sure I can live on a pension with a steep negative yield.
Do you know why pension funds hold gilts?
I suggest you find out
Well, the US government could certainly cancel about a third of their debt – the Federal Reserve owns about $8 trillion now and that could be cancelled. It might bankrupt the G-SIB shareholders though?
Cancelling the debt owed to foreign governments (China?) would be an act of war, so that’s a bit tricky. And foreign investors might be reluctant to lend again if America defaulted. At least for a while.
And cancelling the trillions owed to pension funds – I’m not sure we want to impoverish the elderly like that?
Probably better to carry on as they are – debauch the currency and under-report price inflation so as to inflate away their debts, and just hope that no-one notices?
I am not saying it should
I said it could
It could repurchase that debt
And I have already explained how to deal with dental bank reserve accounts
Why not engage with the issues rather than make ill informed comments?