5th January 2011
In theory, the Bank of England's Monetary Policy Committee has an inflation target of 2 per cent of CPI, but it keeps missing that target. CPI was 3.3 per cent in the 12 months to November 2010 yet the Bank has continued to resist raising the 0.5 per cent interest rate because the recovery is so fragile.
Actually a bit of inflation in an economy coming out of a huge recession is generally seen as a good thing. It's just that a lot of inflation is exactly the opposite.
Henderson Global Investors Chief Economist Simon Ward says: "A key concern is the squeeze on real money supply trends from rising inflation, with the CPI headline rate on course to exceed 4% in early 2011. The demand to hold money may simultaneously decline as real deposit interest rates fall deeper into negative territory but the net effect may be to constrain the economic recovery."
Ward thinks the MPC should have raised rates last summer and must raise rates urgently.
He says: "The inflation squeeze would be less intense had the MPC raised rates last summer. This would have boosted sterling, restraining import cost increases, while firing a shot across the bows of firms planning price hikes. Policy tightening is now urgently required; medium-term growth prospects will be much worse if the current inflation overshoot becomes entrenched."
Stoking the fears further, thisismoney.co.uk reports that global trade is starting to boom.
Chinese inflation hit five per cent in November, two per cent above target and Citywire lists the measures China might have to take to slow it down as one of its five big threats to global recovery along with UK inflation.
However, this is the first time the ECB has breached its target since November 2008. In comparison the Bank of England has missed its inflation target for more than 40 months in the last five years and that is one reason it faces the ire of the comment boards.
On thisismoney.co.uk, Economic Reality says: "The BOE may have left it too late and will now have to increase rates to a higher level than was really necessary. With inflation set to increase to around 4-5% this year, many people are simply not going to accept wage rises of 1-2%.The cost of getting to and from work, either by car or train has sky-rocketed and many employers need to factor in this when setting pay. Once inflation is in the system it tends to snowball as it did during the 1970s."
Also on thisismoney.co.uk, Global Observer is similarly scathing about the Bank's performance and fears stagflation, basically a double whammy of falling growth and rising prices.
He says: "The Bank's Monetary Policy Committee has recently become increasingly concerned over this surge in input price inflation." That is a joke, surely? The MPC have consistently proven over the last few years that they have no concern over inflation at all, although it is supposed to be their only job to control it! This is why they have allowed inflation to get out of control and exacerbated it by their illegal QE debasement, which they had no authority to do."