Mixed signals from inflation data

A couple of days ago the bogus Consumer Price Index registered a dip to an annual rise of 2.3%. The RPI fell further into negative territory. Perhaps the best measure of inflation, RPIX (the one the Bank of England used to target before the target was recklessly changed for purely political reasons), showed a rise of 1.7% per annum.

To put this in context, it means that, at this rate, the value of money would halve in a couple of generations (better than in my childhood when it halved in four years, but not nearly as good as the period 1694-1946 when the Bank of England was privately owned and before pseudo-Keynesianism was absorbed into economic policy thinking). However, the RPIX inflation rate did exhibit a sharp fall from the previous month and is significantly below the target that the Bank of England used to have for RPIX.

Again, this shows how daft the change in the target was. When we should have been fearing inflation, the Bank of England’s target inflation rate looked subdued whilst RPIX was steaming ahead, whereas now the opposite seems to be happening (RPIX is 0.8% below its old target and CPI 0.3% above its target – one measure signals ”loosen” and the other “tighten”). 

Does this mean that those opposing quantitative easing (QE) have it all wrong? Are we headed for deflation (using a reasonable measure of inflation, not the CPI)? Should QE be pursued with even more vigour to stop that from happening? Certainly not.  

The IEA’s SMPC was concerned about inflation as it was building up before the financial crash (and before it became clear in the figures). It was also concerned, about 12 months or so ago, that not enough was being done to respond to new conditions and that the money supply (broadly defined and appropriately adjusted) was falling. The current fall in inflation reflects those conditions when the Bank of England was slow to reduce interest rates. The monetary policy decisions that are being taken now will affect inflation a year or more down the line.  

Whilst the majority of the SMPC favour continuing with QE, some are beginning to look nervous because they know that the time is right to consider how to rein it in. If that time is missed, and QE goes on for too long, then there will be serious problems ahead.

A minority of the SMPC are certainly beginning to see the time on the horizon – not too far off they believe – when policy will have to be reversed. This is all difficult for the Bank of England because there seems to be little institutional understanding (the Governor perhaps excepted) of the role that money plays in the inflationary process. That is why inflation rose too high and also why the Bank’s response after the crash was slow.  

Of course, this trouble would be avoided if we had private competitive money – with the process of competition being used to determine the institutional and technical mechanisms by which money kept its value. Interestingly, when Hayek mused in 1976 about how a private money issuer would respond to the conditions we have at the moment, in order to keep the value of money stable, he described technical processes very similar to the ones being used by the Bank of England today (and which, 33 years later, are being described as “novel”).

For about quarter of a millennium between 1660 and 1914 — with the exception of the period around the Napoleonic Wars — the purchasing power of money in England was not only roughly stable, but was confidently expected to remain so. Even the two world wars in the twentieth century didn’t completely eradicate this folk memory, built up over ten or more generations. That is why the post-second world war inflation was such an unpleasant surprise.At least everyone seems to recognise the possible danger of rapid inflation if the policy of Quantitative Easing isn’t reversed in time. So this inflation — if it happens — will not be ‘unanticipated’ (which is the worst sort).

For about quarter of a millennium between 1660 and 1914 — with the exception of the period around the Napoleonic Wars — the purchasing power of money in England was not only roughly stable, but was confidently expected to remain so. Even the two world wars in the twentieth century didn’t completely eradicate this folk memory, built up over ten or more generations. That is why the post-second world war inflation was such an unpleasant surprise.At least everyone seems to recognise the possible danger of rapid inflation if the policy of Quantitative Easing isn’t reversed in time. So this inflation — if it happens — will not be ‘unanticipated’ (which is the worst sort).

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