Inflation in the UK has fallen below 5%.
I am not surprised. I always said it would. Supply chain disruptions after Covid were, inevitably, resolved. The disruption from the war in Ukraine proved to be the result of stupidity in the commodity markets, and prices returned to pre-war levels, as I expected. And so inflation was always going to go away.
Inflation always works like that. After a period of inflation - most of which periods are of very short duration - things go back to normal.
Danny Blanchflower and I were saying this two years ago. The historical evidence made it easy to do so. And we were right.
And now Rishi Sunak is claiming credit.
He should not be. This was a phenomenon that was largely beyond his control.
Barring one thing, that is. He could have made the impact of inflation much less than it was if only he had told the Bank of England to do nothing to tackle it.
Instead, they have massively compounded the cost of living crisis, left millions with debt they are not sure they can service, and left large numbers of companies tottering on the brink of insolvency, all because of wholly unnecessary interest rate rises.
And those interest rises have fuelled the inflation we have, most especially in rents, car leasing costs and other large expenses households face that are included in our inflation measure.
So, is there anything to celebrate today? No, nothing at all.
But we should be mourning the lost years to come that are the result of the wholly incorrect policy decisions made by the Bank of England.
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But would inflation have fallen if we continued with QE and had interest rates at near zero, as you wanted??? The answer I am certain would be a resounding no…
We did not need more QE, so I would not have asked for it
Did we need QT? No
Now, please explain why low interest rates cause infaltion.
With “counterfactual history” we just don’t know.
What we do know is that incomes were being squeezed by food and energy prices – particularly acutely for those on low incomes who spend the bulk of their income on these basic things. Are you really suggesting that rates needed to rise to take away MORE of their income in the form of mortgage/rental payments? Was that extra “kick” required to stop them going out and “bidding up” prices? The economic text book might suggest so…. but just get out on the street and have a look.
One could argue that the more affluent ARE bidding up prices…. but IF this is the case then higher rates are fuelling the problem as these folk are savers.
Finally, do you really want to rein back investment? That is what higher rates will do…. and we all know that low investment is a perennial problem in the UK.
In short, higher rates have not been the key for falling inflation…. just more misery.
Mr Brandon,
The flaw is the Government claim that they are the cause of the reduction of inflation. At best they are confusing correlation with cause. They cannot prove a causal relationship. Furthermore they haven’t done anything. The BoE has raised interest rates. The BoE can’t prove a causal relationship either (indeed they may have caused inflation to remain higher than it would have fallen). Inflation suggests a rough ‘Bell curve’; ir rose and fell over a period that is quite predictable, related to inflationary externalities in energy, supply chains, just-in-time, over which the Government and BoE have no effect. The prices rose and fell largely due to the externalities. The fall was inevitable.
The biggest factor is the total failure of British domestic energy policy (fake consumer markets, bad regulation, inadequate gas storage, inadequate investment in renewables, poor resilience planning, the misspent history of the oil age etc.). If we look closer at the inflation Bell curve, the energy Bell curve within isn’t really a Bell curve; the energy prices have not fallen bak to the position ex-ante. I would call it a Quasimodo curve, one shoulder remains high. We now have a new price norm higher than it was, because Government failed adequately to plan energy supply. everybody is paying for it. The economy is paying of it. It is yet another economic failure of Government. That is the essential fact about the fall in inflation. The Hunt-Sunak claims of success are Guff.
Thanks
Kathie Wood of ARK invest also her fear is deflation
That is Ann Pettifor’s fear – and there is some reason to fear it
Your headline should have been “Today’s fall in inflation was inevitable and has nothing to do with anything either the government or the Bank of England has done.” You could even have added “And, indeed, it would be even lower without the BoE’s interventions”.
True
My view in answer to Kirk above is that if low interest rates were really such a contributor to inflation, then the rate rises by the BoE would have brought down inflation much quicker.
And they have not.
To me what the BoE has done is the equivalent of doing brain surgery by operating on someone’s toe.
I also believe that the BoE knew – like Richard and Danny knew – that the long game was to always claim credit as inflation dropped naturally as markets and consumers adjust.
In the meantime, rentiers have had a field day and the cost of all of this on society is nothing but a disaster.
An utterly shameful episode ladies and gentlemen.
Take this fall in inflation alongside the data on growth, or lack of it, published last week and I fear you are right and the medication of interest rates could be in danger of killing the patient.
Are you suggesting that inflation is not correlated to money supply and spending? It seems to me you are not grasping the basics of economics here. Higher interest rates can’t stop the impact of covid and Ukraine shocks, but they do slow down new causes of inflation that follow on from these shocks.
I am suggesting that the quantity of money need not cause inflation – V can be inversely correlated with M. I wp0ouild suggest that is the evidence.
And as matter of fact interest has increased infaltion and so far doing nothing to re3duce it – because the ntime lags do not allow for that to have happened as yet
But they can create recession
Mr Thirot,
You begin with correlation, and end with causes. Correlation does not entail cause.
A little knowledge is…. An irritating thing.
Of course inflation is correlated with spending. Your problem is that spending is not obviously inversely correlated with interest rates (as your argument assumes). I think Richard has pointed out there could, in fact, be a POSITIVE correlation. Richard’s talked about the indirect upward pressure rates have on inflation due to debt (e.g. car leasing, utility bills to debt-funded infrastructure “businesses”, and the simple fact that real businesses tend to borrow money for perfectly sensible reasons and the increasing interest costs often must be passed on in price rises to the consumer). I’d add that interest rate rises achieve other perverse ends. They take money out of the pockets of borrowers who are often already buying the bare minimum for survival (so can’t cut their spending if they want to stay warm and fed), but put money in the pockets of lenders (I.e. depositors) who are quite likely to spend the windfall – I.e. put up interest rates, and you get a net increase in consumer spending (not always, but likely in the current economic environment).
But you don’t need to posit a positive correlation between interest rates and spending to disagree with the grossly simplistic view of conventional economics (shared by you and the central bankers – nothing to be proud of). It’s surely obvious that inflation is the product of two big things, supply costs and demand. Demand in this context is mainly driven by the disposable income people have. Supply costs recently have been inflated by Covid, war and weather. But they are also driven by Government regulation/deregulation. That’s a complicated equation, but who can think of any meaningful price caps imposed by the UK Government? Which markets have truly been opened up to increased price competition though government policy (a Conservative fundamental principle apparently!)
I’ve been in a series of consumer-focussed company meetings in Canada this week – a small market, but I think people will agree the following sentiment extends to European and US economies. I’ve suggested that the punters don’t have too much money to spend at present, and the response has been one of eager and concerned agreement. In other words, business is concerned that normal people (the drivers of the economy) have already cut back to the bone.
I also note that the betes noire of inflation legend – The Weimar Republic, Zimbabwe and Venezuela – have all been driven by supply constraints and not people having too much money to spend.
So if you agree with my premises (feel free to explain why not), what is the obvious solution to our problem? High interest rates or something else? There are alternatives to interest rates, and they’re inevitably controversial. But let’s debate them. Let’s not just be drones and repeat the dumb mantra – ‘we need to increase interest rates to cut inflation’. It is, sad to say, a stupid idea.
But it’s also an argument that benefits the rich (increased income) and hurts the normals (increased costs) and, if actually successful (there are some true believers) also benefits the rich (inflation comes down and real debt value does not decrease) and hurts the normals (inflation comes down and real debt value does not decrease).
So I argue that those that lobby for high interest rates to curb inflation fall into two categories: the ignorant (that’s OK; all of us are ignorant of almost everything, but don’t pretend a degree of knowledge you don’t have) and the wicked – those who put marginal self-interest above the life and death reality others experience.
For another perspective on the desire of neo-liberal government leaders and central bankers (most of whom have one eye on their financial futures) to focus monomaniacally on interest rates: follow the money.
Thanks
15% interest in the 60’s did not stop inflation and it did not this time. When will they ever learn.
I don’t think many people realise that inflation figures are based on prices over the last 12 months. Since gas prices peaked around Aug 2022, we expected inflation to fall one year later as these figures are no longer factored into the last 12 month calculations. Natural gas historic prices can be seen here: https://tradingeconomics.com/commodity/natural-gas
Gas prices fell further and reached a low in Apr 2023, so inflation should fall further, and may even go negative around May 2024, when prices rise again.
The government’s role in this in minimal.
Correct
Andy Verity broadly agrees with you. https://www.bbc.co.uk/news/business-67424738
David Byrne says:
Ian Tresman’s reply provides a link to important factual data, the global cost of gas. Today, 3.1 dollars per MMBtu; at peak approximately 10 dollars (my vague recollection post March 2020).
Wholesale prices have fallen dramatically on a global basis with no real price reductions in the UK domestic market.
Could the reason be that the oil and gas majors are being allowed to make obscene profits by a government that wishes to inflict misery and possibly premature deaths on its (freezing) people?
On the other hand, could it be that the lure of private profit gained by Shell, BP and Centrica shareholders is the reason? And how many of our esteemed (warm) politicians and the entitled hold such (hot) securities?
In particular, if Centrica pays wholesale prices, are the recent reductions passed on to British Gas customers? The simple answer is no.
In the words of Dean Baker, the markets are “rigged” and, as politely put by Robert Reich, we are all being “shafted”.
Two illustrative words to include in the economics dictionary!
I might share some charts in this this morning
I think that most people still believe that when corporations are making a lot of money, that this trickles down into the rest of the economy.
13 years proves this is not working, but it suits many.