Elites continue to be mad for draining ordinary citizens
Simon Ward in the Financial Times argues that current inflation in the UK (running at 2.4% officially, or 2.75% by his estimates) represents “an overly-loose monetary policy stance” and requires the Bank of England to raise rates sooner than expected.
Now, by any historical standards in periods when everyone was prospering, 2.4% is not high. Neither is 2.75% In fact, because of price and wage stickiness, having low inflation (say at 2%) is anti-growth. It makes it so that sectors in deflation can’t reduce relative costs, because they can’t drop nominal costs. The author does go on to acknowledge that his argument is based on the Bank of England setting inflation targets correctly, but that’s entirely the point: most central banks aren’t, especially in the Western world.
As usual the issue is this: having come of age during the great stagflation spike of the 70s and early 80s, or having been trained and mentored by those who did, current decision makers are constantly fighting the last war, a war that ended almost 30 years ago. They have a fear of inflation which borders on paranoia. This isn’t 1980. Attempts to fight inflation in particular sectors (meso-inflation) as if it is macro inflation, by using clumsy gross macro-tools will do more harm than good. Absent a new great depression across the entire world, riptide inflation, especially in commodities and oligopoly goods, is not going away.
Particularly fascinating is Ward’s claim that since bank lending rates have become disassociated from official rates from the central bank, that a raise won’t effect the British recovery. If it won’t effect rates, then one is hard pressed to understand what effect it will have at all. The answer, according to Ward, appears to be psychological. Raising a rate which does not effect actual rates will harm no one, but still reign in inflation.
This is magical thinking at its best, and deserves a visit from Tinkerbell. Clap, or inflation will kill a fairy!