Wednesday, 16 February 2011

Inflation Jitters at BOE

It was noted today that inflation has ticked upwards significantly again.

The main reason put forward by news reports is the increase in VAT, but the real story is food price inflation. I reported last month that food prices have started to increase significantly more than the government's CPI measurement.

Food price inflation has had a major hand in the new wave of political unrest in the Middle East. The EU is now taking measures to abolish food import restrictions in the hope that food prices within the EU stay at current levels or drop thanks to the removal of supply restrictions in order to avert similar political unrest happening in Europe.

Food price inflation is a real concern in the world of politics: we've seen in the past couple of weeks that high food prices can have disastrous effects on the political status quo: Regimes have toppled.

Food is not a luxury, its a necessity for survival and humans will do anything (and I mean anything) in order to ensure continuity of their food supply.

There is real concern within the political establishment on how to keep food prices stable whilst at the same time allowing inflation to reduce the national debt.

What concerns me is our political and financial managers sound rattled and unsure what to do. Inflation isn't selective: you cannot prevent food price inflation while at the same time using inflation to shrink the national debt. Fuel price inflation influences food prices because it increases costs in the supply chain.
You cannot keep a lid on wage inflation while the costs of subsistence constantly increases. You cannot keep benefits fixed if the cost of basics like food outstrips them.

Currently the Bank of England is attempting to keep interest rates low in order to reduce the cost of lending and stimulate the economy. The problem is, the huge inflationary pressure quantative easing has on the economy has built up and is overtopping the dam and its about to burst.

The other problem is that fact that even with low interest rates, there has been a reluctance by the banks to lend and the increases in tax and the burden of red tape and bureaucracy that has built up over the years is preventing new businesses from forming and growing the economy.

Right now, we're on the verge of the second decline in the economy, along with rampant inflation: the "stagflation" that economists have feared for several months now.

I said a couple of years ago the course that had been set for this country was a disaster, that the plan of using inflation to shrink debt would have serious consequences.

What scares me most is that it appears no-one in charge of the economy has a clue what to do next...

Was today their "oh shit" moment?

No comments:

Post a Comment

Note: only a member of this blog may post a comment.