From up high the hawk looks down upon the poor unsuspecting doves, preparing to swoop down, and ruffle a lot more than just feathers. Yesterday, the Bank of England governor Mervyn King sounded like an arch hawk, as he said we are “ready to take whatever action” is necessary to fight inflation. And then just in case we were in any doubt he said there was a 50-50 chance inflation would hit 3 percent this year, and it was even more likely it would reach that level in 2007.
Rising costs of energy, have been joined by university tuition fees as the catalysts to rising inflation.
The Bank of England’s target for inflation is 2 percent, but should the CPI index move a full percentage point above or below that level, then Mervyn King will have get his writing paper out and send a Dear Gordon letter, explaining to the chancellor how it has happened.
Not so long so, the fear was that price rises would dip below 1 percent, and that deflation was the big threat. But now, it’s beginning to look as if rates could rise again, hitting 5 percent, and indeed if the 3 percent danger increases they could go up from there.
At a time when the consumer is in debt, retail is enjoying a precarious recovery, rates rises will hit the UK hard, but then the era of low inflation and sustained growth could not last forever.
For some time we have puzzled over the phenomenon of low inflation despite high consumer borrowing and record spending, something economic text books said was impossible.
Inflation doves dismissed recent inflation fears by saying the current increase in prices are one offs, promoted largely by the higher price of oil. But the danger is that the factors behind the benign climate of low inflation we have seen in recent years, were also one offs. That low inflation was caused by cheap imported good from China and Internet induced competition, and that these are one time only effects.
The fear has to be that the high spending we saw earlier this decade has built up to create pent up inflation, awaiting the release in the one off deflationary factors
Inflation will never be as bad as it used to be. Price competition is too fierce and consumers less tolerant of rising prices than they once were, but the warnings from Mervyn King are worrying, and we should hope that his hawklike stance proves to be a one off show rather than a persistent trend.
Investment and Business News is a succinct, erudite and informative roundup of today’s top news stories on business and the economy, with analysis thrown in. It’s free, and to subscribe: visit this link
© Investment & Business News 2013