Those readers of this blog with economics-geek tendencies (No? OK, just me then.) might have seen yesterday’s news that inflation is falling pretty sharply at the moment:
Retailers were forced to slash the price of summer clothes and shoes last month to tempt rain-drenched consumers into the shops, driving inflation to its lowest level since November 2009.
The Office for National Statistics said inflation measured on the consumer price index slipped to 2.4% in June, down from 2.8% in May, with clothing and footwear prices accounting for the largest downward contribution.
This is hardly a surprise. The economy is flatlining and has been for some time, as everyone’s well aware. This means that aggregate demand isn’t going anywhere (hence the fall in retail prices), which, combined with falling energy prices makes a drop in inflation pretty much exactly what you’d expect. Which in turn means that the Bank of England made the right call in keeping interest rates so low for the past three and a half years. The Monetary Policy Committee judged that the risk of worsening the recession by raising rates and choking off demand was greater than the risk of raising inflation by keeping rates low, and they judged correctly. Which is funny, because I’m sure I remember a hell of a lot of rightwing media outlets and Very Serious Economic Forecasters insisting that interest rates were going to have to rise to prevent runaway inflation, and that the ‘doves’ on the Monetary Policy Committee were naïve fools to think otherwise.* So, just for fun, I did a bit of googling. Here’s a sample:
UK interest rates must rise to 3.5pc, says OECD – Daily Telegraph, 27 May 2010
Bank hawk Sentance warns: we need to raise interest rates – The Scotsman, 30 December 2010
BOE Doves Living on Borrowed Time – Wall Street Journal, March 11 2011
BIS Says Central Banks Need to Raise Rates to Tame Inflation – Bloomberg Business Week, June 27 2011
My personal favourite, though, has to be everyone’s favourite Telegraph comment writer, Dan Hannan: libertarian, climate change denier and inflation-hawk extraordinaire. I feel a bit guilty having a go at him two posts in a row but he does present some open goals, bless ‘im. Hannan not only gave us a dire warning of impending runaway inflation as recently as three months ago, he even provided links in the same article to previous pieces he’d written making the same wildly wrong predictions, asserting repeatedly that prices are going to skyrocket any minute now. Since the much-maligned “experts” of the MPC turned out to be right and Hannan and his Austrian School buddies were wrong, can we expect a mea culpa from any of them any time soon? I have to admit I’m not holding my breath.
*It’s worth noting, of course, that while it’s heavily implied to be an essential policy that’s good for all of us, a rise in interest rates principally benefits those with savings in the bank and minimal debts – that is, (mostly) the rich – and hurts those with debt liabilities (i.e. the rest of us), but of course that’s a complete coincidence.