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Mervyn King is a “fan” of inflation – New report sees inflation near 7%

Today we got the Quarterly Inflation Report from the Bank of England. Alongside the report came the Governor of the Bank of England’s remarks on the latest report. Lets deal with those comments first.

King’s reports that the “big picture has not changed”, and that there is a “good chance” CPI inflation could hit 5% this year (more on this later).

King seems to totally have it backward when looking for the causes of inflation:

“there is a good chance that, if utility prices rise further later in the year, inflation will reach 5%, before falling back through 2012 and into 2013. Inflation is being pushed up by a range of influences – primarily the past rises in commodity and import prices, as well as the increase in the standard rate of VAT.”

No, the rise commodity prices and import prices are being pushed up because of inflation. Inflation defined as an increase in the supply of money. You know, all that money printing called “quantative easing”. For a fuller look at the proper definition of inflation read this.

Once again the Bank of England starts talking about its mysterious mandate to concentrate just on “medium-level inflation”. Mysterious because as we’ve covered in great detail in our piece “UK Inflation -Is there a point to the Government’s inflation target?” no such mandate exists, anywhere. The BoE now sees a “risk” to even achieving its self-mandated medium-term inflation:

“An important question for the MPC is whether the current high rate of inflation will affect its medium-term level. There is a risk that continuing high rates of inflation will push up on inflation expectations, or lead to some resistance to the erosion of real take-home pay. Either of these mechanisms could put upward pressure on wages and prices looking ahead, and imply that inflation will not fall back as sharply when the temporary effects of higher VAT, energy and import prices come to an end.”

The BoE then goes on to hold up the straw-man of a slowing economy and stagnating wages as a deflationary force to counteract the rising prices, seemingly forgetting that the very term stagflation defines a situation where the economy is shrinking and prices are rising. This phenomenon was experienced in the late 70s and early 80s and blows a rather large hole through the argument that you can’t have high inflation when unemployment is high and the economy isn’t growing. Also it should be remembered that most countries who experience hyper-inflation (a loss of faith in the money) do so from a base of high unemployment and no-growth in the economy.

The Governor then gives a tacit admission of the pain the public are facing caused directly by the reckless policies of both major political parties and the Bank itself:

“…household spending may have further to adjust to the significant squeeze in real incomes and there is substantial uncertainty over the speed at which net exports will pick up.”

Then comes this dozy:

“The projection in the first part of the forecast is markedly higher than in February, mainly reflecting the probability that the increases in energy prices between February and May will raise electricity and gas prices.”

A quick look at the side-by-side inflation fan-chart projections charts from February versus today highlights exactly what they’re talking about:

Bank of England inflation gold
(click for sharper image)

First up whoever suggested to the BoE to use those fan-charts is probably inline for a knighthood, what better way to cover your all your prediction bases than to essentially predict all outcomes. That aside we can see clearly that the BoE now thinks that near-term inflation might go as high as 7% not ‘just’ the 5% mentioned at the start of this article. This is higher than the bank previously thought in the last Quarterly Inflation Report.

Yesterday Paul Wiggins over at Market Securities was out with the chart below. It’s looking at the 10 year government bond. He is looking for the cost of borrowing by the UK government for 10 years to start moving a lot higher and possibly reach as high as 4%. Remember, Greece, Ireland and Portugal weren’t a problem until the cost of borrowing rose too high and insolvency followed. Will the BoE let rates spike higher risking questions being asked about the UK government’s ability to pay? Or will the BoE have to consider another does of money printing to bid up gilts? We should get the answer to this question sometime around September/October of this year.

Gilts 10 year bonds gold

(click for sharper image)

Sterling strengthened against the dollar immediately after the report but has been slipping back this afternoon. Gold fell back to £917, a level we’ve sighted several times as good support.

Finally, a  quick look at the Governor’s words in a wordcloud tells us all we need to know.

Bank of England inflation gold(click for sharper image)

Aside from the words we would expect to see (inflation, prices etc) there’s that word “medium” again. How long will it take before someone in the mainstream points-out that the mandate for the BoE says absolutely nothing about looking at inflation in the “medium-term”. From the mouth of the remit letter legislated in the Banking act 2008 itself:

“The Inflation target is 2% at all times

No comment needed.

(final chart courtesy of Bloomberg)

 

 

 

Link to this article: : http://www.goldmadesimplenews.com/gold/mervyn-king-is-a-%e2%80%9cfan%e2%80%9d-of-inflation-new-report-sees-inflation-near-7-3728/

Posted by on May 11 2011. Filed under Gold News. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry
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