The Bank of England hit the panic button today. Dressed up with some mumbo-jumbo about inflation rising too fast, and then falling dramatically, the MPC decided that the printing press is the answer to a stagnant economy. In truth, we had been sufficiently softened up for this that the only real question was whether to do more QE this month or hang on until November, when the latest Quarterly Inflation Report would be published.
Share prices jumped, to the usual chorus of boos from the dissidents who claim it is either unnecessary or irrelevant, and would merely store up inflationary troubles ahead. I’m not so sure. We’ve heard about inflationary blips often enough before, but this time we might really be in one. It is really quite hard to sustain the momentum of inflation in this environment. VAT is not going to rise again next January, and it’s likely that oil will end this year cheaper than at the start of it, even in sterling terms. Metal prices are soft to soggy, while soft commodities have also stopped going up. As Mervyn King might put it, there is no sign of “second-round” effects. People grumble about the squeeze on their incomes, but only the public sector unions are threatening strikes, and even these are about pensions, not pay.
The Bank’s record on forecasting inflation is pretty dreadful, and its belief in the “margin of unused capacity” in the economy borders on the pig-headed. Yet the UK has to adjust to a lower standard of living in the face of too much debt and the Chinese industrial revolution. The combination of frozen wages and rising prices may turn out to be the least painful way of getting there – it’s certainly preferable to 20% unemployment. If this was the strategy Mervyn and his men were really following all along, they managed to keep their secret through dozens of speeches and minuted meetings. It’s more likely to be the right answer for the wrong reason, but then everyone needs a little luck.