The UK inflation debate is heating up

The last 24 hours have seen quite a pick-up in the debate over likely levels of infation in the UK. The starting gun was fired by a letter to the Financial Times from Baron King of Lothbury although I note it is described as coming from Mervyn King. Actually the opening is really rather curious.

Price stability is when people stop talking about inflation. It is a long time since inflation was a talking point and memories of an inflationary past are short.

That is because much of 2021 in financial markets has revolved around talk about inflation. Indeed whilst I doubt the word “transitory” is used on the modern equivalent of the Clapham omnibus those who follow financial markets will be aware of its significance. We have inflation building in the world financial system and central bankers are ignoring it because they claim it will fade quickly. The headline case of this comes tomorrow with the US CPI numbers for May. But perhaps such matters do not get discussed at the House of Lords.

Our member of the most noble order of the garter is on much warmer ground here I think.

First, the large monetary and fiscal stimulus injected in the advanced economies is out of all proportion to the magnitude of any plausible gap between aggregate demand and potential supply.

Whilst in many areas we have little idea of potential supply the stimulus has been so large he has a case which is also true about the area below.

The silence of central banks on current high growth rates of broad money has been deafening.

This is a subject to which a blind eye has in general been turned. Actually central bankers will be keen on part of the formal monetarist argument here. That is that the broad money growth flows straight into nominal GDP ( Gross Domestic Product) growth with a lag. They are hoping this will happen much more quickly than the 18/24 month lag of traditional theory. Also their swerve if you will, is assuming it will turn into real growth rather than inflation. The latter is the rub and if history is any guide we will see some and as the push has been large the risk is that the inflationary impact is large too.

The next bit meshes several arguments together.

Second, a combination of political pressure to assist in financing budget deficits, unwise central bank promises not to tighten policy too soon and an expansion of central bank mandates into political areas such as climate change, all threaten to weaken de facto central bank independence leading to a slow response to signs of higher inflation.

It is nice to agree with him for once as the bit suggesting central bank “independence” has effectively morphed into keeping bond yields low is true. The mission creep argument is also true as central banks get out tins of green wash. The Bank of England got out another tin yesterday.

Today we launch an exercise to find out how climate-related risks could affect large UK banks and insurers. Our Climate Biennial Exploratory Scenario investigates the effects of taking climate action early, late or not at all.

Considering the problems they have had with economic models which is supposedly an area of expertise then if I was them I would steer clear of scenarios about which it must know even less.

Our climate scenarios help us to understand the risks UK banks and insurers may face from a hotter world. In our scenario where no additional action is taken, global warming reaches 3.3 °C.

As to the mention of unwise central bank promises our Merv is on weaker ground as he made his own.

Finally we end as we started.

It is when central banks stop talking about inflation that we should be concerned.

The issue is summarised by the use of the word “transitory” again. It is being talked about meaning it is the assumed conclusion that is the problem. It leads us to one of the core central banking problems which is if you dither and delay you will be too late. That leads us to the suspicion that this is an excuse not to act as it feeds the “It’s too late now” line of Sir Humphrey Appleby in Yes Minister.

Andy Haldane

Proof that central bankers are discussing inflation was provided this morning by the Bank of England’s chief economist.

Bank of England Chief Economist Andy Haldane said on Wednesday there were already “some pretty punchy pressures on prices” and the central bank might need to turn off the tap of its huge monetary stimulus.

“If both pay, and costs are picking up, inflation on the high street isn’t very far behind. And that’s something, you know, people like me are paid to keep a close eye on and we are,” ( Reuters)

He was on LBC Radio and frankly that could have been from a script written by Baron King of Lothbury. As was this.

“And that may mean that at some stage we need to start turning off the tap when it comes to the monetary policy support we have been providing over the period of the COVID crisis.”

Although even he is being rather vague “at some stage” albeit to be fair he did vote to reduce the planned amount of QE bond buying of which there will be another £1.15 billion today.

This bit is really rather confused.

He has previously warned of the risk of a jump in inflation as the economy bounces back from its lockdown crash.

Haldane told LBC that there was still a need to encourage households to spend which might be made easier if companies paid their workers more.

How can you encourage people to spend in a boomlet ( Bloomberg quote him saying the economy is “going gangbusters”) without risking inflation? The inflation risk rises further if he gets the higher wages he wants.

The final punchline according to Reuters was this.

“The risks at the moment for me are that we might overshoot that number for a bit longer than we’ve currently planned,” Haldane said.


There are several issues here and let’s start with our former Governor. He claims there has been no debate when in fact there has been one but that is the issue as it has been one-sided. Also he has two skeletons in his own cupboard. Back in 2010/11 he “looked through” a rise in UK inflation ( both CPI and RPI) went above 5% and even more significantly that led to a decline in real wages we have never really recovered from. Also in spite of claiming he wanted owner-occupied housing costs in the inflation measure it was on his watch ( the switch from RPI to CPI) they were removed and even more significantly have never been replaced after nearly two decades. So news like this from Monday points straight at him.

“House prices reached another record high in May, with the average property adding more than £3,000 (+1.3%) to its
value in the last month alone” ( Halifax)

If we now switch to our “loose cannon on the deck” Andy Haldane there is the issue of wages. These have been struggling in the UK for more than a decade. Recent evidence albeit from the US is that firms have resisted raising wages in response to shortages. Also some workers have found the furlough schemes to be a disincentive. Thus the picture here is both cloudy and complex.

But there is something behind this because the central banks have ignored history and seem determined to continue doing so.


15 thoughts on “The UK inflation debate is heating up

  1. Hello Shaun,

    re: ” It is a long time since inflation was a talking point and memories of an inflationary past are short.”

    pfft! thats rich coming from him!

    ignore inflation , well he did , but it happened any way and continues to happen even with flawed metrics such as CPI which are designed specifically to hide inflation.

    CB’ers hide inflation and tell us we’re not talking about it …… when we see it and talk about it …. more twaddle from the ivory towers .



    • Hi Forbin

      If we look back there is this from Mervyn back in February 2011 when he had to write another explanatory letter to the Chancellor.

      “Inflation is likely to continue to pick up to somewhere between 4% and 5% over the next few months, appreciably higher than when I last wrote to you.”

      As usual it was apparently nothing to do with hime.

      “That primarily reflects further pass through from recent increases in world commodity and energy prices. ”

      Also as usual.

      “The Monetary Policy Committee’s-central judgement, under the assumption that Bank Rate increases in line with market expectations, remains that, as the temporary effects of the factors listed above wane, inflation will fall back so that it is about as likely to be above the target as below it two to three years ahead.”

      Oh and checking into it some three 0.25% interest-rate increases were factored into that as opposed to the none we got.

      Finally there was a particular gem.

      “Although one cannot be sure, prices excluding the effects of these factors would probably have increased at a rate well below the 2% inflation target”

  2. “Transitory” inflation is an outright lie. It’s black propaganda. It’s plain fraud.
    Inflation is counted incrementally, not absolutely, & so is immediately baked in.
    To give an example; if inflation is 100% one year, 2% the following year, it is, in fact, 4% of the original price.
    There are lies, damned lies & statistics.
    Crude dishonesty, & more proof, were it needed, that the elites are evil, not stupid.


      Year 1: If a block of wood is priced at £1 and inflation at 100% doubles it to £2. Year 2 inflation is 2% the block of wood rises to £2.04

      Year 3 How can inflation be 4% of the original price?

      Sorry if I sound a bit thick here but I dont understand your methadology.

      Min you I dont understand very much of these fantasy economics anymore as the printing press rolls out bank notes at ever increasing speed and interest rates go into negative territory.

      Sooner or later the wheels will fall off and the baloon will burst.

      • Weeeeeellll. The original price is £1 & so, in the second year, that 4p price rise is 4% of the original price (absolute), although only 2% of the later price (incremental).
        So the year at 100% is baked in to future increases.
        I thought that was obvious. No?

      • Please don’t take this personally, but I do not see how someone can up-tick a post which fails to understand another…unless of course, there are viewers who WANT others not to understand.
        You may not take this seriously, but I would imagine that Shaun, being both adept & sceptical in his field, & his blog, very likely attracts elite interest here.

        • I shared Peter’s confusion about what you were saying, therrawbuzzin, but now I see what you were getting at. We are all friends here, I hope, and Peter got you to explain yourself more fully. I completely agree that If you did have a huge inflation rate every so often and 2% inflation the rest of the time, you really wouldn’t have a meaningful 2% inflation target.

  3. Hi Shaun

    Great article as always.

    So the boe is becoming concerned about wage inflation. Remember the boe are not here to help society, they’re here to make life more difficult. They’ll be happy that inflation is rising, disproportionately impacting the poor. They will not be happy with the wage inflation occuring in low income jobs. Maybe its time to increase rates to punish the debt laden public.

    In classic myopic central bank world, disinflation discourages people to spend money and wait for things to become cheaper. And yet now with goods rising in price:

    I think I’ll wait before any more purchases 😉

    • Hi Anteos and thank you

      They forget that if inflation was kept around 0% then even a low level of wage growth would give us real wage rises. The prefer their models to reality even though they keep being wrong.

  4. Another problem brewing for the UK is a shortage of HGV drivers which in turn is affecting the food supply as outlined in this report.

    Strangehy enough I know the Chaiman of this company Bernard O’ Malley his company has ramped turnover up the last few years and appeared to be doing very well up to the covid crisis now his business seems to be having problems getting drivers and stock rotting in cold storage.

    One of the problerms with furlough is lots of people being paid for not working and a number of them probably are in effect unemployed in real terms and will be in due course.

    The GOV is encouraging people back to work but if someone is being paid to stay at home it wont be easy.

    The food and vegetable industry has tiny margins and rotting vegetables in cold storage could see the company go into a loss, if its not already in a loss situation.

    Seems the industry is having to increase wages for drivers all which will add to upward inflation.

    • but this doesn’t matter

      we have saved the TBTF Banks ( again) they are the economy!! …… just print some more money……. nothing can wrong …




    • Having had the “pleasure” of supermarket fruit & veg far too often, I’d say that it rotting in cold storage is Karma.

  5. Great blog as usual, Shaun.
    In your conclusion you note that “in spite of claiming he [Mervyn King] wanted owner-occupied housing costs in the inflation measure it was on his watch ( the switch from RPI to CPI) they were removed and even more significantly have never been replaced after nearly two decades.”. A Bank of England official, Gary Lewis, kindly explained this seeming inconsistency to me some years ago. Of course, when the RPIX was switched for the UK HICP, since that is what it is, and the use of the CPI label for it was one of Gordon Brown’s least useful changes, it was widely believed that Eurostat would be shortly adding an owner-occupied housing component based on the net acquisitions approach. Therefore it was no big deal that for a few years there were no housing prices in the target inflation measure. In a 2007 FT interview King grumbled: “I must say the experiments they’ve been carrying out have not been with measures of housing costs that I would find the most attractive.” Mr. Lewis explained that King was a partisan of the opportunity cost variant of the user cost approach. An index of this kind was introduced in the initial February 1993 Inflation Report with the delightful acronym HARP index. Support for it obviously never acquired the traction needed for it to replace RPIX as the target inflation indicator. If King has gone quiet since then it is because conceptually it is very close to the rental equivalence approach. (In fact, if one allowed the return on owner’s equity to be derived residually, equating it to the imputed rent measure, the two measures would be identical in terms of their actual empirical estimates.) King, it seems, was never a fan of the “leaning against the wind” stuff as most advocates of the net acquisitions approach are, so it never had much appeal to him. Regrettably, things seem to be evolving, slowly but surely, along the road to the CPIH becoming the target inflation indicator of the Bank of England, the “one index to rule them all and in the darkness bind them.” Therefore, King has no real reason to talk about the subject any more.
    Incidentally, I was part of a session with two other papers on monetary policy in the virtual annual conference of the Canadian Economics Association on June 4. The other two papers were both quite brilliant. One of them was by Michael Ehrmann on “Point Targets, Tolerance Bands, or Target Ranges? Inflation Target Types and the Anchoring of Inflation Expectations.” Michael has really moved around, working for the Bank of Canada, the ECB and now the Swiss National Bank. It was interesting to me that Michael seemed to have none of the conceptual qualms that former ECB President Mario Draghi had about adding an OOHPI based on net acquisitions to the HICP. To him, the main problem with the OOHPIs was that they weren’t yet ready to be incorporated. (Hard to argue that since after more than two decades of development they are still quarterly indices calculated with an unacceptable lag.) Still, if his way of thinking, not Draghi’s, is generally reflective of the ECB as an organization, then the ECB must eventually come back to incorporating a higher frequency, more timely version of the existing OOHPIs into the HICP for the euro area. It is hard to see that there is any acceptable alternative.

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