18 Oct 2011

Inflation is the Resurrection as the economy that is no longer ‘on track’

A horrible inflation number of 5.2 per cent, an RPI number of 5.6%. Inflation is at a 20 year high, eating into people’s living standards. The misery index too, that C4 News flagged up earlier in the year is now at a 19 year high.

The response of Sir Mervyn King in a speech in Liverpool tonight, is to reassure, as he did in my interview with him a fortnight ago that inflation is “at or close to the peak”. The curse of the inflation projection may soon strike. Two years ago  the BoE thought that inflation today would be 1.5% on the central projection, instead of 5.2%.

I thought there were two other new things from Sir Mervyn’s speech. Firstly he says of UK economic policy that: “We were on track”, which rather suggests we are no longer on track, because of the Eurozone crisis. Does that mean a Plan B, or Plan A or many hundreds of billions of dollars more in QE?

How about a thought experiment? Would the Coalition Government have raised VAT, and therefore raised inflation and hit growth, if it knew what was coming from the Eurozone?

What we do know is that the Bank and Treasury are now working together on a plan to channel money into small and medium-sized businesses. This is an elaboration of the Chancellor’s plans for “credit easing” or as I said a few weeks ago “Plan BoE”