22 november 2009, inflation fears are really not exaggerated

Sunday 22nd November 2009

Regular readers will know that for a long time I have been warning that it is not deflation, but inflation that should be our great worry, and that the temptation to inflate away our mountainous debt is highly likely to become irresistible. I am not alone. Inflation this month hit 1.5% (CPI, click here for an explanation as to why this is the right measure), which is some way from what the bank of england were predicting earlier this year, just 0.6%. That’s quite a massive gap. The action they took on that basis – quantative easing – is also massive, yet has not stopped, even as inflation has continued its upward trajectory. This gradual rise can be considered highly likely to continue, not least because QE is pumping massive amounts of cash into the system, which in turn is undermining the pound, which in turn makes imports more expensive, which in turn drives inflation. Rising oil prices (which will continue, given emerging market demand) also don’t help – but are eminently foreseeable. I only half-jokingly speculated some months ago with a colleague off to the imf on the likely size of the uk’s loan. “We used to think you could spend your way out of recession by boosting government spending but I tell you now, in all candour, that option no longer exists” – so said jim callaghan in 1976, “it only worked on each occasion by injecting a bigger dose of inflation into the economy, followed by higher unemployment”. In the grand scheme of things, inflation, inflation, inflation is likely today's biggest legacy.