Βι¶ΉΤΌΕΔ

Perhaps waiting until after the May MPC meeting might have been the time for the vote - maybe the MPC will have an attack of sanity and give us the 50bps needed to wake people up the Gordons giant Ponzi scheme.

A big factor that your discussion here neglects is monetary growth. The MPC accepts that, over time, the key determinant of inflation is money. And monetary growth has been extremely fast in recent years, exceeding 14% at one stage last year and still at just under 13% now - this compares with the something like 8 to 10% growth that is compatible with a 2% CPI target over the long term.

Now the numbers above may make some readers dizzy, but the upshot is fairly simple: when there's too much money around, then prices will go up, and there is too much money around now.

Analysis of the effects of Easter, or of tuition fees, and the rest, are all interesting enough in their own way, but they remind me of the comments of climate change sceptics when talking about hurricanes. Of course, any particular storm can't properly be attributed to global warming - there will always be some better more detailed "local" explanation, involving special factors. In just the same way, there will always be some better more detailed explanation than money growth for why inflation rises in a particular month or over a few months. But in the end, just as (setting irrelevant details aside) more CO2 means more warming, so (setting irrelevant details aside) more money means more inflation.

Monetary growth has been way too fast for some years, and continues to be. Perhaps inflation will fall back for a few months because of other special factors, but in the end, unless monetary growth slows down, inflation will come back.

So who runs the UK economy now - is it China ? - is it Russia ? - or is it Brussels? Perhaps Gordon will have to take up croquet too ?

The short sighted British economists need to realise that planned economies operate on longer periods than 1 to 5 years. Far Eastern analysts plan for 50 year economics, which are difficult to predict, but should not be ignored. How many more figures can be fiddled by Gordon Brown to allude the country that everything is healthy. CPI inflation to ignore Council Tax and Mortgage payments. Longer accounting periods. Shorter accounting periods. Whatever fits the bill, it's been done. Ignoring the realities of economics is foolish. Measure the real inflation rate for a change. The boomerang of economics is relentless, and will never repent.

A generally fair assessment - but when does a 'blip' become a trend?
With fuel and commodity prices set to rise further over the coming decade as China and India grow their economies, and rapant inflation of the UK money supply (about 14% a year) I can't see inflation just magically dropping back to 2% anytime soon - and if it did, I'm sure it would only be downward 'blip'.

Something I also find worrying is how CPI has constantly lagged RPI (and analogously wages have constantly lagged house prices) in rate over almost the whole last decade. One part of the economy can't de-couple from the rest of it indefinitely, and if for instance wage growth is at 3.5% and population growth at 0.6%, then the total amount of money available for spending in the economy will ultimately not increase faster than 4.1%*. This means nothing can increase in price faster than this in the very long term.

[* I'm not an economist so this may be a flawed assumption - if so, sorry!]

What this has to do with CPI is that perhaps goods are (as you point out) one of the things being kept cheap by foreign imports currently, so maybe the value is not as representative of "real" inflation as the government likes to make out. If goods are lagging in price over a sustained period they will form a smaller and smaller piece of each person's spending "pie". Eventually this slice of pie becomes "almost negligible" to the spender and they cease to care about price rises in things like bread, at which point retailers are free to increase prices, something also referred to as happening in the MPC's letter.

Caution should be the watchword for all. However I'm curious about a piece of advice elsewhere on the Βι¶ΉΤΌΕΔ site, namely 'Q&A: High inflation and you' (https://news.bbc.co.uk/1/hi/business/6563013.stm).
Here it is suggested that we shouldn't "bet on house prices to crash." Then the unnamed journalist proceeds to give various flaky reasons (opinions) why house prices, instead of crashing, may go 'sideways' - essentially advising us to bet on house prices not crashing.
I haven't read the Βι¶ΉΤΌΕΔ guidelines for financial journalists, but I'm sure unqualified opinion encouraging risk is not appropriate...

On the upside, it's good news for savers with fixed interest mortgages!

Why put interest rates up in May when they will come down again after the Summer

If energy suppliers had passed on the fall in energy costs to consumers the inflation figures would have dropped.

Also the recent oil price rise were due to events in Iran, if we had sorted that out better and quicker the prices would not have risen so much.

If its all largely about energy prices, how come inflation in France, Germany and Italy (none of whom have oil, and all of whom use it as we do) is lower than ours? I think the real story is that Gordon's chickens - PFI, unfunded public sector pension liability etc - are well and truly roosting.

As William McChesney Martin, former chairman of the US Fed said, the job of a central bank is to "take the punch bowl away just when the party's really getting going". Yet the Bank of England's let the party rage for decade now. Just look at house prices, cheap credit or the expansion of the money supply.

Gains from globalisation, like outsourcing manufacturing to China, or using cheap Polish labour in Britain are one-off. So if they've helped to lower inflation, the benefits will dry up, even if we've all profited and GDP has been boosted.

Perhaps the party is coming to an end?

I think the most interesting thing to come from higher inflation is Mr. King's letter. It talks mostly about action that has already been taken (rate hikes of 75 basis points) to reduce inflation following increases in energy prices last year. This suggests that Mr. King regards the rise as temporary. He makes no mention of the 'China effect' or the slowdown in immigration (which had previously had held prices down in the same way as Asian imports). Because of this, the letter implies that the MPC does not regard drastic interest rate rises as necessary. More generally, it seems that the 'Letter Writing' at the first hurdle has not outlined a 'Plan of Action' as such (as its designers may have presumed). This will only be justified if their implicit prediction that the rise in inflation will disappear over the coming months itself turns out to be true. On this, we have to trust the MPC's forecasting models, rather than jumping to the conclusion that the 'Letter Writing' framework is toothless.

As for 'Mr. Brown's Ponzi-scheme', it is difficult to see how the Treasury is responsible for the current over-valued stock of housing. If the earlier poster has any ideas about how to discount house prices into the MPC's discretionary framework, maybe he/ she could write to the MPC to tell them how. Raising interest rates quicker? Perhaps, but this would not have had any impact on inflation now because the transmission mechanism has a on-to-two year lag.

I think the measure of inflation is flawed - have you seen the basket of goods? They include items now such as high end electronics, which fall in price, hence reducing inflation. This could be argued that the measure better reflects todays world, but as these goods reduce in price people buy more expensive models.

Real inflation, they kind that you or I see if running beyond what these figures suggest and has been for some time.

Will we see it come down? I doubt it. The pound is rising strongly, when the pound collapses again as happens in all cycles, the UK may be in for an inflation and Interest Rate shock.

Nice blog Evan, very balanced.

This past month's CPI increase (unaffected by changes in home energy costs) hit 6% on an annualized basis -- 300% over the Bank of England's target. The Bank is betting the house that falling gas prices later this year will bring inflation down, but the price war envisioned for the gas companies has yet to materialize. Only four companies have announced cuts, and no one has announced a price cut for almost 2 months now. Given that consumers don't really cares what their home gas bill looks like during the middle of summer, the gas companies are going to be in no hurry to announce further cuts. I'd say that the gas price deflation is going to be much less significant than a lot of people (like the Bank of England) assumed and higher inflation is going to be around for a lot longer, especially if the Bank of England keeps sleeping on the job.

We are now entering a very difficult period for the BoE. If they raise interest rates too high the cycle of borrowing on the back of house price rises will reverse. If the buy-to-let landlords start to sell then house prices will drop, with the risk of sending the whole economy into recession.

Could it be the 2% CPI figure is just too low to be sustained in the long term?

Gordon Brown has put plenty of backspin on the economic boomerang of his chancellorship. It's been curling high until now, but as with all boomerangs, it'll return with the clout of a fist and a punch. A change from the linear boom and bust from the Tories, this time a spinning boomerang.

This is balanced blog, well done Evan!
Let me just remind here that the CPI target for BoE is 2% not 3%. But since a nice rubber band of 1% was also introdced (+/- 50%!!), with the symbolic postcard from the Governor kicking in at 3%, discussions bloom when targets are missed by a "mere" 50%.
Congrats to BoE and Government for fooling us while interest rates should be NOW at 6% already! And what inexcusable myopia of our rulers for not understanding the long-term drivers of inflation.
(Evan, would it be more helpful if YOU wrote "the letter" to the Chancellor and the Governor...?!)

We don't need interest rises to push us over the edge. One day soon people will wake up to the fact that they have been getting poorer in real terms for the last 10 years.

They have been conned by the imaginary wealth "locked" into their homes, meanwhile salaries have stagnated and are being kept well below inflation.

When the dust settles people will ask themselves how they could have been so stupid as to believe that nominal paper wealth had enriched their lives. You'd think we'd all be a bit smarter having learnt similar lessons from DotCom.

As it turns out we believe any old tripe that politicians and companies with obvious commercial interests spout on the TellyBox. At least Evan you are there to counter with some all too rare good sense.

I think the feel good factor fuelled by rising property prices have been a contributing factor behind UK rising inflation rate and Gordon Browns Pension Tax rate raid should be partly to blame as investors have had to look to property investments to make good their pension shortfalls.

I'm a businessman and was interviewed by the BoE, regarding the state of the economy, last year -I recall that they suggested that inflation was likely to fall back down to 2% in the short-medium term -and that was a year ago!!!! In fact, the reverse has happened. In my opinion, the MPC needs to hike IRs by at least 0.5% immediately - money supply growth is out of control, the housing market is crazy, costs are continuing to increase... Are we entering the much feared 'inflationary spiral'? The situation is v serious. I'm losing confidence and may relocate my business to a jurisdiction I have more confidence in.

Evan, Milton Friedman's famous "Inflation is always and everywhere a monetary phenomenon" sticks in my mind. Is it not the case that inflation is present, it just isn't showing itself through consumer prices, which are kept low because of china and india? Growth in the money supply is still way above growth in output and it is true that inflation is too much money chasing too few goods. In this case should monetary policy not target asset price inflation as well as consumer price inflation in order to keep the economy in check? Is the asset price inflation we have been experiencing a direct result of globalisation where artificially low interest rates have resulted from cheap imports which in turn has fuelled asset price inflation? What are your thoughts?

Re: "It's difficult to see how the Treasury is responsible for the current over valued stock of housing"

Without housing costs included in the monetary policy framework of the MPC, then of course house prices are the responsibility of the Treasury and the government.

The Treasury should have taken action long ago to ensure that a series of policies were put in place to discourage excessive asset price inflation.

This is easy to do - tax policy can put a disincentive on speculative investment, the government can make sure there are stricter rules placed on mortgage lending (thus restricting speculative demand). In fact it is vital given its absence from the MPC remit.

The problem is that the government doesn't like the politics - rampant house price inflation wins votes from wealthy old people (a key constituency), even when it corrodes the economy in the long term.

An interesting economic view from the Βι¶ΉΤΌΕΔ, but...the real danger to the UK economy is the US market struggling with the high debt in the secondry mortgage market. This could replicate itself here (UK) with the bubble burting on the personal debt mountain that has been allowed to accumalate.

Couple this with the latent tax increases we have endured over the last 3 years, and we seem to be looking at an economy that has been mismanaged and is ripe to implode. Some one has to pay for the UK's personal debt mountain at some stage, its a matter of when not if.

Keeping inflation on target? you make me laugh, Gordon & Mervin. Whose target?! In a global economy, where a terror attack sends petrol prices in a spin in a matter of seconds, and where countries like China dictate half of all consumer goods' prices? Guarding the 3% treshold with the only weapon of punishing UK ordinary people (who have mortgages and cards to pay) is no economics. It's just another way of pushing the hard pound in the bank's pockets. That 3% is neither sane nor sustainable.

I was concerned with the ONS figures:

"The Office for National Statistics (ONS) said CPI inflation jumped 0.5% in the month, a rise which lifted the annual rate to 3.1% - the highest since the series began in January 1997 - from February's rate of 2.8%"

Surely 2.8 + 0.5 is 3.3 - so is the headline figure wrong, the February figure, the increase, or is it a new form of maths?

Now how does this impact the economy?
Rise of inflation will lead to rise of the pound. Hence loss of competitivenous. And the companies with American connection will see fall in profits ( P/E ratio ) Also companies will leave UK.

Now for the Big One.
House Prices will fall due to higher rates of interest. Now you might ask its not as bad as 15% as it was before.

Answer, in the good old days borrowings were 3 times wages, with small credit card and other out goings.

Now the mortgages are 5 times wages. Around 8-9 times Net wages which is a big factor never talked in any place. Also in addition other borrowings are also on a all time high. Credit card, Council tax and taxation in general Don't forget the recent budget You will be paying more one way or the other.

This will push more people over the edge. Although the interest rate is less but its the point of how stretched the people are?

Also to add, last year 750,000 people talked to CAB because they have failed mortgage payments. Consider this not everyone comes out of their shell when things go wrong.
So expect a lot more to fail this year.

Keep your fingers crossed.

It would have been more intresting if Mr king was not so lucky in January, by just missing out by 0.1% point on the inflation target threshold.By having to write his "excuse" letter then i wonder what he would of wrote this time round?
I'm Sure they have a well prepaired list of excuses to use!
Lets face it, as we are going to have to, for the last ten years we have financed this growth, just like a buy now pay later plan. we will all have to realize that in the UK we the consumer will have to pay more to live and think twice about what want we spend. this will slow growth but the accounts book will look more healthier. After this period the sales will start again and the opertunities will present themselves.
Its not Boom and Bust but a more gradual, predictable, stable reality.
Economists will learn a bit more from this cycle in order to prolong the next cycle of economic growth.

Normally when we think about run away inflation we think of central banks printing money. One only needs to look at the money supply (M0) figures for the first 3 months of this year to see thats exactly what this government have been doing.
A 7% M0 growth for March, what do they expect to happen to prices?

As a result of dithering over past 24-36 months in not controlling unsustainable house price inflation with interest rates to cool UK gradually - the Bank of England is risking disaster by now having to react with a shock - that could ultimately result in recession. With the US housing & credit market so shakey this could also have implications for us over in UK regards confidence/growth, and the average house buyer with mega-mortgage could be in for a disappointment. Are we around the corner from another early 90's boom & bust.......I wouldn't be surprised if this inflation continues to run away from us given the fundamentals won't change. I remember mortgages reaching 10-15% in early 90's. Hopefully we've learned the lessons in protecting ourselves from widespread insolvency (- we said that last time !)

Low and stable inflation is a desired and favourable situation for a good economy. This leads to consumer and business confidence creating jobs, increasing tax revenues and creating less of a burden on public expenditure (benefit payments). High inflation attracts higher interest rates. Also a high exchange rate, this may also fuel inflation as imports will increase. It will also make our exports more expensive and our balance of payments situation will worsen.

A large percentage of motgage holders in the UK are on variable rate mortgages. In contrast people in Germany are mostly on fixed rate mortgaes. Interest rate increases alone are not effective. What we need is more stringent supply side policies eg. the government can reduce company tax on items in the CPI list, making production of these items more attractive to produce and therefore increasing the supply of these goods. More supply will lead to lower prices.

Oil and housing have in-elastic demand curves, any rise in prices will have a smaller percentage decrease in sales. The reason for this is, there are no close substitutes to home ownership and oil. In contrast, items with a large amount of substitutes are elastic in demand, are very competitive products and any increase in price will have a much larger percentage drop in sales as there are alternatives.

The government must clearly stop spending now as this fuels inflation and needs to work on making supply more responsive to the increase in demand we are experiencing.

The China effect may have helped hold down prices. But, it is not the sole factor, or even the most important. Time-consistency of monetary policy has been the key component.

For non-economists, this is monetary policy is consistent year-on-year and everyone, including the markets, believes this will happen. Politicians make lousy central bankers. They have to grab votes every four-to-five years, so they will sacrifice monetary policy in the chase for votes. Independent central banks with a clear objective and mandate do a much better job. Effectively, politicians always require higher interest rates to convince the markets they are serious about inflation.

Monetary policy was loosened by the government when the Bank of England's target was changed. The old RPI target of 2.5% was replaced by a 2% CPI target. At the time, many analysts thought 1.7-1.8% made closer equivalents. If RPI was still the target, the Bank of England would have written a letter every month since September 2006. Since then RPI has gone from 3.6% to 4.8%. Some blip!

Evidence of further erosion in the Bank of England’s credibility comes from the labour market. Seasonally adjusted wage inflation jumped from 3.9% in Dec 2006 to 4.8% the following month – unfortunately the ONS has yet to publish more recent figures.

The market needs a strong signal that the Bank will not stand for high inflation in any circumstances. If I was on the MPC, I would vote for 50 basis-points increase.

Quelle surprise higher than expected inflation numbers (historical) leads everyone to think that MPC will hike rates to deal with a historical rise in prices - whats the phrase - driving by the rear view mirror. Or will the MPC panic and raise rates?

Here's the irony MPC is supposed to keep inflation in control in the future and should not hike rates now to reduce past inflation.

As usual the City folk are relying on historical data to substantiate what in my view is a poorly supported argument for their long held view of further rate rises. But note the hysteria following the inflation data. Misery loves company and the herding on this issue is unsurprising - I'd like to see how much the C ity folk raise their 1-2 yr inflation forecasts as a result of this data to justify the rate hike call.

Base effects will see the numbers come down in the coming months and in the first half of 2008 factor in the tax bite and real cuts in pay for public sector workers GPs etc should constrain the ability of passing on higher prices of highly elastic goods (bit of economics)

Oh yes what about strong sterling doesn't that make things cheaper re imprts given our marginal propensity to import (even more economics wow) Another irony rate hikes should see sterling fall - Fisher equation and all that but in the real world where heuristics reign the opposite occurs - c'mon Evan explain the economics of a country with an appreciating currency when it is also raising rates (Fisher woiuld scratch hus head)

Still stick with my call of no more rate hikes in 2007 and possible rate cuts by end of 07 start 08

It should be obvious why the China effect is ending. China is a massive importer of raw materials and has been pushing up the prices of these for many years now. This causes the price of everything else made from these materials to also rise. But more significant than this is that the West and in particular the UK, has allowed China to send more and more imports over here and decimated our manufacturing. Consequently, competition has diminished allowing China to subtly raise her prices, causing inflation. Once again, short term gain has been put before long term disaster.

Until it was mentioned yesterday, the obvious point that some day the price of imports from China will bottom out had simply not occurred to me.

But of course it will happen - and more importantly, it will affect everybody, not just the UK. Will it, for example, push the US further away from "soft landing" and more towards "recession"? Will it help German exports become more competitive? Will it restore our economy and Germany's to the relative positions that old timers like me are more used to? When China starts spending heavily on environmental issues (which it will have to do sometime, even if only to clean up its domestic water supplies), will this accelerate the effect?

This particular inflation figure may be a blip, but the underlying trend is higher, and the upper bound may well be breached again before inflation is got under control. I suspect that there are long term inflation dynamics at work that the BoE economic model does not include. The oil price rises – and copper, nickel, tin price rises etc – are the flip side of the boom in Asian production which has made manufactured goods cheap. You can’t have one with out the other. The direct effect of fuel price rises may drop out of the index, but is now being passed through to food prices, both via production costs and competition with biofuels. The direct effect of higher asset prices never does appear in the index, but it does raise pension and housing costs, which drive employment costs up, which are passed on in, for example, higher council tax.

In my opinion, the BoE made a tactical mistake by the complacent tone of the letter to the Chancellor. It may have avoided frightening the domestic audience, but the bond and foreign exchange markets can be punishing if they sense that the authorities are reluctant to take unpopular corrective action. It will probably mean that short term interest rates have to go a little higher than would have been necessary if the letter had expressed more contrition and determination.

Why has OFGEM, the energy regulator, not taken any effective action to compel gas and electricity prices to be reduced following large falls in the wholesale markets for these products?

The BoE's so-called independence is a myth otherwise why would its governor be forced to write a letter to the chancellor explaining why inflation is so high? As if it's his fault!
No, it's just a smart, in-built way for the government to blame the BoE if things turn pear-shaped. It's pretty obvious that interest rates are artificially low and should be at least 1% higher than what they are now and would surely be round about this mark if the BoE was truly independent.

I am deeply worried, not about inflation but about our trade deficit.

We are importing more than ever before, not only cheap goods from China but also American entertainment.

Immigrant labour from Poland and Hungary is also an import, they tend to send a big proportion of their pay back home to their family.

We hear very little about our exports, I don't know of many. As a country we are incredibly good at small, innovative products that fill a small niche and sell extremely well around the world. Then of course there are the big things like the Airbus A380 whose wings are made here.

I seriously doubt that these make up for the sheer volume of stuff that we import. I remember there was a story on the Βι¶ΉΤΌΕΔ before last Christmas which showed a huge container ship about to dock which had arrived from China full of stuff for Christmas.

And when you figure in that multinationals make huge profits here, most of this money then goes to shareholders who could be anywhere in the world.

There seems to be a flood of money leaving the country and just a trickle coming back in.

Here's another idea, the Poland effect. It gave the economy a one-off boost by helping to control salary costs. But it is wearing off now, because (I think ) of:

1 - The Poles (and Czechs etc) that have lived and worked here for long enough now know how bad the cost of living is here (which is compounded if they send money home) so won't settle for ultra-low wages. They pay rent, council tax, utilities just like everyone else!
2 - Their English has probably improved a great deal so moving to a better paid job is easier so they feel secure enough to ask for more wages or to move to better paid jobs.
3 - Those returning and those in the UK spread the word about the cost of living here and how much you need to earn to their fellow nationals newly arrived or just about to come here.
4 - They'll probably warn the Bulgarians and Romanians about this as well.

Consider them if you will as a sugary snack, the energy boost they give soon wears off leaving feeling worse than you did before.

On the 'China effect': all the inflationary pressures we feel here are also at play in developing markets (labor costs are also rising in China, at least as far as skilled workers are concerned). Oil price increases are also global issues and impact almost EVERYTHING we buy, since petroleum products form the basic raw materials for so many manufactuered items. Oil prices also effect the commodity price of other energy feedstocks (seen the price of coal lately?) All these pressures are impacting manufacturing in places like China, as well as Britain.

You know the days when governments could stamp their feet, raise domestic interest rates and beat inflation down are long gone when even the US Federal Reserve is admitting that there are "external factors" that need to be watched!.

It's still too early to say whether the interest rates set by the BoE are working or not. Every meeting that the MPC has will upset the volatile markets and have direct short term impacts. However, in the long run we are seeing a drop in the figures of unemployment, and perhaps a little inflationary pressure is the small price to pay for a booming economy.

I for one think that the balancing act of pursuing an extinguishing or accommodating policy is one that I'm glad I don't have to deal with...

When we had the last major problem such as this, the world-wide-web wasn't in existence (we did have the Internet) so communication of such news, was not so widespread as today.

A lot of the hysteria will die away and the BoE will leave rates as they are next month if it hasn't, followed by a couple of rises whilst Parliament are in summer recess (all the journos will be off on their hols too) so it'll all slide away and the more jaded of us will look back and say '7%, you don't know you're born, better than the 15% we had in '91)

It's all very well to comment and note that China/Middle East petro-countries/EU have a major impact on the UK economy. Don't buy foreign manufactured goods! Don't re-mortgage your house to buy cars/boats/holidays. I'm sure the Darwin effect will be very good for a few people.

The economy really is teetering on the edge.
We have almost as many unemployed as we did in the early 80s but are now "disguised" as "long term diabled"(BoE report) and "pretend jobs" all of which cost more than honestly declared unemployed.
We have had a "Keynsian by proxy" spending by equity release and credit card instead of direct government.
10%-15% more Β£s printed by the "independent" BoE, which is going to cause inflation.
Talking of which the housing "boom" is another word for this inflation.
"artificial reduction of the interest rate encourages increased borrowing,It tends ,to in fact, encourage highly speculative ventures that cannot continue except under the artificial conditions that gave them birth" Henry hazlitt, Economics in One Lesson,1946...so its hardly hot off the press so you would expect a chancellor and the head of the BoE to know the basics.
The continued speculative activity at the current interest rate is a good indicator that it is below inflation.The taxation of savings at source also skews the apparent savings rate below inflation so saving is still a mugs game, saving nothing but borrowing below inflation is still viable.
The trouble ahead is even at below inflation borrowing requires income to service the debt and the compounding of all that mortgage and credit card debt coupled to the reduction of real incomes mentioned above and the sagging of the ponzi effect mentioned in other comments above are rapidly eroding that ability.
Hang on tight the early 80s was just the rehearsal.

Evan, one thing I really don't understand about inflation is why all commentators universally accept it as a bad thing. For anyone with a mortgage, inflation is actually a good thing, provided interest rates stay under control, as it erodes the value of your debt. My parents were lucky enough to have a mortgage at a time of fairly high inflation (through the 70s and 80s), and when the time came to pay it off, despite a pretty serious shortage in their endowment policy in percentage terms, they just paid off the outstanding amount more or less out of the loose change in their pockets (OK, I exaggerate slightly, but not much).

Why is inflation bad?

Evan

Can't agree more.

But you didn't mention (or was it a case of not wishing to over egg) your other fav point on the counter inflationary pressures in the UK economy, that of imported labour.

Also, how inflationary do you think that a (surely it has to happen) rise in China's currency relative to the GBP will be?

Perhaps you want to enlighten us on productivity or any other way that we might get out of the potential mess.

Lessons in smug control for Tony and Gordon?

Brian

I am amazed and saddened that so few people feel moved to comment on such big news compared to decimalisation, which I had not considered as a primarily economic issue…..so here’s another comment!

China’s rise is the biggest economic event of my lifetime. I fear that it is going to make us poorer, and there is little that we can do about it. Basically, a billion plus Chinese (not to mention people in a similar position in other former communist countries) just decided to stop handicapping themselves, and start competing with the rest of the world for its limited resources. This sort of thing has happened before, with Germany and then Japan, but they accounted for a relatively small fraction of global population, so thanks to underlying economic growth our standard of living did not need to fall in absolute terms to accommodate them. China is different. It could be difficult for our political system to accept and deal with a need for our standard of living to fall.

The change is due to competition rather than globalisation, and closing your economy will not help, because even if you shut out Chinese goods completely, you still must compete with them in other markets to trade for goods that cannot be produced at home.

As for UK inflation, if the BoE does not tighten at least 25bps at the next MPC (lossaversion and Ralph Beales), it would be a disaster. Sterling would fall and they would probably end up raising interest rates a lot more later. But I think they understand that, and will move.

One thing that is often overlooked in the "China effect" is the US $ pricing. With the Chinese curency steadily appreciating agianst the Chinese Yuan/Renimibi, Chinese factories are bound to increase their USD prices over time to counteract the loss of earnings when they translate back to their own currency.
Add in their inflation (higher than ours) and their even crazier house prices, neither of which their economic masters have had to deal with before, and I am sure we will see goods from China becoming quite a bit more expensive.
Without price deflation in goods to offset the high price inflation we have in services in the UK means we'd better get used to higher interest rates all round for the next 5 - 10 years. The same logic applies throughouty the western world.
That is the big risk, and no doubt will unwind a lot of the clever M&A, private equity and hedge fund activity that has been no more real in building business assets than high house price inflation has been to households.

I am confused, but then what is new?

People here are saying (as they are elsewhere) that inflation is to be controlled over the long term and we can't say if the BoE has done the right thing because it won't be visible to us for about 18-24 months. Well that begs the question, surely they weren't doing things right 18-24 months ago?

Others have commented on Evan's balance reporting and I must agree that it is. However, I can't help but have the sense that Evan is more negative in general about the economy than his reportorial (is that even a word?) ethics allow him to display.

To write such an article without mentioning M4 is ridiculous and misleading.

The rate of inflation is 14%.

Most currencies are being debased as a result of globalisation and the need to keep prices low for exports.

If you want to hold on to your purchasing power buy gold, otherwise your money will be confiscated covertly by the printing of money out of nothing b the BOE.

I always have to laugh at the British MPs in the House of Commons talking about inflation, exchange rates, their policies to control them, and other economic factors they have really little or no control over. I'm always reminded of body surfing the breakers in the ocean and getting overwhelmed by a wave far stronger than I can possibly resist. All I can do is move where the water is pushing me and hope that I come out of it unhurt. Britain trimmed its sails during the era of the hated Lady Thatcher. The relatively modest pain it suffered then was minor compared to the suffering it would have gone through now, pain France and much of the rest of the Eurosocialist EU will go though as the laws of economic gravity are finally catching up with them. All of the drivers of what happens to the world's economy is outside Europe (and wow do they know it and hate it.) Watch the US Federal Reserve Bank. It has to make a major decision in the next few years. The government is in hock up to its eyeballs. Will it print money like crazy inflating the value of the US dollar even further than it already is and pushing it even lower on world markets or will it increase interest rates plunging the US economy into recession and the rest of the world with it? A crisis in the Middle East could send oil prices skyrocketing to over $100 a barrel easily within a single day or two and it could top out at anywhere from 150, 175, even over 200 a barrel. The US dollar is now at around 2 pounds sterling to the dollar. If I were British and had some money in the bank....I'd consider buying into the sagging American housing market. There is a limited time opportunity there to pick up some excellent real estate at bargain basement prices. It won't last forever. Just be glad you are not tied to the Euro and get dragged around under wherever tide the wave of French politics carries it.

I have a different view. The analysis of the situation is based upon a slow steady growth economic strategy. But as I am aware strategy emerges into a different set circumstances all the time and requires a different strategy.

To recap, the economy of the nineties was turbulant and boom and bust, therefore at 1997 a slow steady growth strategy was prefered and was accepted by people as being the right thing to do.

Now its different, people have more wealth, to invest, to take more risks and in the case of prices the natural thing would be to rise in amongst the economic and spending growth that we have seen.

Therefore I forsee a slow steady build straegy where we all further build up our assets and wealth, as we become richer naturally prices will rise, but as our ecomomy is more robust and people have built up or are building up greater assets, a market or ecoonomic crash is less than likely. But as I said people will spend more money as they will have more to spend therefore prices will rise. Expect inflation to be at 5% within 5 years but not to go worryingly high.

Aren't we also over-looking the effect of the upturn in Euroland? About 60% of our product exports and a large proportion of our tourist and services incomes are drawn from Euroland, so an end to the long recession in Euroland probably enables companies to firm up prices on the back of that extra spending power.

Money supply is growing much faster than outputs in both the UK (as some of your commentators have observed) and in Euroland. That suggests we need to restore the UK Bank rate differential over the Euroland rate - and quickly.

Tim Young #50 wrote "China's rise is the biggest economic event of my lifetime. I fear it is going to make us poorer, and there is little we can do about it"

The standard of living in most of China is well below that of the UK and the developed world.

If China's living standards are to rise some of it can come through better productivity and more efficient use of scarce resources. But unfortunately for us we cannot keep our excess share of the global economic pie forever.

What we will end up with is a smaller share of a bigger pie, and it is too early to tell how that will leave us in real terms.

As China takes over from the US as the world's superpower, we may see the equivalent of what happened when the US took over from the UK, which is that standards of living in the UK still improve, but are equalled or overtaken by China.

Lets face it the UK domestic economy has been underperforming for sometime and demands was sucking in imports. With China offering cheap white and brown goods, the UK's economy prospered with the strong pound. We are now seeing the effect of dependence on imports which is a rise in inflation as demand continues to rise. With a rise in interest rates, that should stop spending.

Adam (post 28),

"For anyone with a mortgage, inflation is actually a good thing, provided interest rates stay under control"

More inflation would be great (for you, not the lender) if your mortgage interest rate is fixed, as you say, you'd get some help reducing the real value of your mortgage.

However, if inflation is allowed to rise, and your mortgage interest is not fixed, lenders will increase it to compensate for the higher "mortgage erosion", hence higher inflation probably won't make your loan (or those of new buyers) more expensive or cheaper. What it will do in real terms is make you pay more now and less later. Those later years will be more comfortable, but only because you will be forced pay more today (and if you're stretched at the moment, that's not a big comfort)

Your parents had higher inflation, but therefore they also had higher mortgage interest rates. This in itself didn't make loans more expensive in real terms, but it did make them less affordable at the outset. They were lucky not because the inflation ate their loans, but because the high inflation meant they couldn't afford such big loans to start with, and neither could anyone else, and therefore houses where priced accordingly.

House prices are bid up today because low inflation means everyone can afford to borrow more initially, not because loans are that much cheaper. They will discover (as you seem to have) that more affordable today is less affordable tomorrow.

This China effect is the subject of a tremendous amount of poor argument and information; most of which results from scaremongering for political effect. Read below the Chairman of the Federal Reserve recent speech and you will see that the US believe the impact to have been overstated. So who does that leave us blaming now?

Enjoy.

We feel in our company, that as we import a lot a goods from china and have dealings with the states.. We are heading for a hefty correction in the UK, it is like a knife edge now... what is next? Housing crash? Possibly, people are cutting back on what they spend, putting more and more money into getting on to the housing ladder or trying to upgrade, it will end in tears and by the looks of our business very soon..

We wholesale to shops, now what is odd and triggers worries is this, shops are demanding lower prices more now than in the past, yet they are screwing them upwards to the end consumer? Why? increased costs? Increased property prices?? Gordons terrible policies? Who knows but the signs are warning us now.. Get out or get burnt..

This is only our opinion..

Anyway, aside from all this complicated money stuff, how'd you enjoy ther marathon on Sunday?

Are not the rising food prices cited by Mervyn King in his letter to the Chancellor another very important factor? With global warming causing droughts in Australia, infestations of rats in eastern India and other extreme weather events do higher food prices not present, by far, the biggest threat to inflation? We cannot put off spending on food whereas we can on clothing, electronics and other durables. For a low income family like ours food makes up the biggest portion of our spending. Add to that the water shortages in the South East. These are likely to progressively worsen, causing tension between those who need drinking water and those who need it for agriculture. The push to biofuels made from corn in the USA has already increased the price of HFCS (high fructose corn syrup) which has eaten into soft drinks makers' profits. It has also meant that many Mexicans can no longer afford to feed themselves. Is there a chance this could one day happen here? Would it not be a good idea to reform the Common Agricultural Policy now to allow more food imports?

Chris (59) and Adam (48),

Actually, the mechanism by which Adam's parents were able to pay off their mortgage easily was more dubious than Chris suggests.

In the 1970's UK interest rates were at times more than ten percent below the rate of inflation, because exchange control gave the lenders no alternative but to accept it. Basically, some of Adam's parents' wealth was (legally) stolen by their generation, from the savings of previous generations, especially savings held in fixed interest bonds, and from future generations in the form of a risk premium on sterling debt. Do explain that to them if they tell you how hard they had to work for what they have now!

Tim (64),

I'm sure you're right about the 70s, I wasn't aware of those aspects, sounds pretty bad.

I think it correct to say though, that nominal rates today are for a large part lower than the 80s because of low inflation, and therefore not as cheap in real terms as they seem, and the housing boom is therefore partly based on the illusion of cheap money.

And apart from perhaps an increased inflation risk premium, higher inflation would not necessarily make loans more expensive, but almost certainly less "affordable", reversing some of this effect?

Chris,

I agree; the main effect of inflation on a mortgage is to effectively change the rate at which the borrower repays the principal. If inflation was high but constant, mortgages would probably adjust to make the early repayments of principal lower or even negative, in which case the rate of inflation would make no difference to affordability.

Tim,

If monthly payments are fixed, surely you cannot accept negative principal repayments to start with, as the loan would simply grow for ever?

Also not sure about your affordability point, do you mean over the lifetime of the loan? Basically, because the real value of each monthly payment deteriorates faster in the higher inflation environment, you need higher payments to start with, hence the loan is less affordable at the outset in a high inflation environment. Not cheaper in real terms, but less affordable, surely?

Surely what happens next depends on competition?. My manufacturing operation (yes a manufacturer in the UK -shock horror) cannot raise its prices when it feels like it (I wish we could). If we passed on on cost increases competitors would steal some of our customers. So if input prices go up it is likely to be our profit margin that will take most of the strain (until radical product innovation or downward cost initiatives allow us to restore the margin). IMHO the whole "cost-push inflation" idea often ignores cut-throat competition.

No person has yet to blame estate agents for its they who drive the market prices and greed from the sellers, thats what makes buying homes so expensive ,if your foolish to borrow this money then you have to have some caviat .They have an unconditional view on the value of their homes due to what some other recieved for theirs down the road ,you have to live some place ,your only rich on paper and when you go its anothers wealth ,We spend the largest part of our income on an assett we will seldom realise in our lifetime.
For what? to say I am worth XXXX

Hey i think that the economics growth of the UK is down very much to the china effect, this may be also inflationary for the mermaids that live under the sea.