WEDNESDAY, MAY 13, 2009
So... Er... Where's That Deflation?
We'll be fine if we just pump up the tyres
The government and the Bank of England have spent the last six months telling us the country faces the mortal peril of deflation. Unless they slashed interest rates to the lowest levels ever, and cranked up the printing presses beyond the wildest dreams of Robert Mugabe, Britain would surely disappear into a vortex of plunging prices and mass starvation.
As regular BOM readers will know, we think they've got it dead wrong. We reckon they've now pumped in so much monetary stimulant, inflation is virtually certain to return as a major problem. They are taking us straight back to 70s style stagflation.
Today, the Bank published its latest Inflation Report. And guess what - even theyno longer think we're facing deflation.
Here's their updated inflation "fan chart", summarising their main projection of future inflation:
As we can see, the Bank now envisages no serious risk of deflation. Apart from some slight chance of CPI inflation dipping briefly into negative territory later this year, it's higher prices throughout.
So what we'd like to know is WTF are they still running the presses at MAX?
Yes, we all know we're facing a pretty horrible decade. We have to recover from Brown's Bubble. We have to consume less, and pay down our debts. We have to start earning our living without all that froth in the financial and property sectors.
But these are painful structural adjustments we cannot avoid. The Bank's extreme monetary stimulus is not going to help. It may make us feel a little better in the short term, but only at the cost of worsening our longer-term problem. The 70s showed us only too clearly that we can have a stagnant economy right alongside roaring inflation - the worst of both worlds.
With the world and his wife now gabbling about those greenshoots, and evenMoney Box Live urging listeners to dribble themselves back into stocks, the Bank should certainly not be pumping yet more money into the system.
It should be reversing course.
Now.
Before it's too late.
Labels: inflation
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