By mbaxter 18 Jun 2008 [5 Comments | 400 views]
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Oh governor, what did you say?
“Money spending is increasing at a normal rate. In the year to 2008 Q1, it rose by 5½ per cent, in line with the average rate of increase since 1997, a period in which inflation has been low and stable.â€
And in that one sentence Mervyn King may have committed a major faux pas.
This debate over inflation has a lot more to it than the internal affairs of Britain. And so did the years of modest inflation we saw earlier this decade.
Let us remember the late 1990s and early noughties.   This was the era of a retail boom, of consumer borrowing, of tiny saving. An era in which we saved though our houses, and that was about it.
We should have had inflation. That we didn’t was down to a number of factors. One is still with us, and working – weaker unions, meaning more modest wage rises. But the other two factors have gone.
First there was the Internet; this prompted price competition never seen before, and surely was the catalyst to the fierce price competition which then followed on the High Street. But this was a one-off, and has had its effect now.
Then there were cheap goods from China, India et al. Well, that period is at an end.
Suppose we had experienced the spending boom of the late 1990s and early noughties with these factors which don’t apply today.   It seems likely we would have had inflation – severe inflation.
All the factors that the text books say should cause inflation were in place; instead, due to factors outside the control of central banks, we had low inflation.
Now the Bank of England is saying we should relax because spending is only growing at the same rate seen since 1997. ONLY?
The last ten years or so have seen this curious position of lack of kilter.   In the UK and US we weren’t saving enough. In China, Japan and the oil exporting countries, saving was too high.    That was another reason why inflation was so low; perhaps it was the true underlying reason.
Economies said this had to change. Now it is changing.  The credit crunch is forcing us to save more.   The rise in the price of oil and food is down to consumers in places such as China spending more.
In short, inflation is down to the global economy changing the way economists said it should.
That is the true issue at stake today.
Forgive me for being a bit simple, but surely we did have massive inflation during this period. House prices were increasing at an average of 10% per annum!! it’s just that they dont figure in anybody’s inflation calculation. I’ve always held the view that inflation is inflation and is bad. My children now have a problem in trying to buy house because they have inflated so much.
You are not wrong. Central bankers have coined the euphemism ‘leaning against the wind’ to describe this.
Should they have upped interest rates earlier this decade in order stop house pries from rising?
They didn’t, yet now many are urging them to lower rates to stop house prices from falling.
But there is another important point. In Japan ten years ago, and during the build up to 1929, asset prices had been rising fast. When they crashed, a period of deflation followed.
A danger today is that when oil and food stop rising, and hopefully then fall, the combination of falling house prices and falling oil and food prices could lead to deflation in consumer prices, as happened in Japan and during the Great Depression.
This is why, right now, central bankers face an extraordinarily difficult balancing act.
[...] Mervyn King is no TV presenter, so he said it instead in the natural language of central bankers, econ [...]
I take issue with you on one point – the reference to “the price of oil … is down to consumers in places such as China spending more.” In China, as in much of south east asia, the retail price of oil is controlled by the government. With inflation already high, the Chinese government has maintained the price cap leaving the domestic oil companies (publicly listed but still majority state owned) squeezed in the middle. They’ve all been running huge losses this year. With the exporting companies huge energy users, and very inefficient users with prices so low, the ultimate benefactors are the end customers ie us!
So the whole subjecy gets even more complicated.
With perfect timing the Chinese Government raised oil prices on Thursday (19th) to the surprise of economists and consumers alike. Petrol in China is now about 39p a litre.
And the locals are complaining!