The Treasury and Central Bank are right

Discussion in 'Economics' started by morganist, Feb 17, 2011.

  1. Why the Treasury and Bank of England should do nothing about the short term rise in inflation.

    (Please can you comment on the blog so it shows that people are reading it. I am getting a hundred plus views a day but people are commenting here rather than on the blog so it looks like no one is reading it. If you could post on the blog then copy it here I would be grateful).

    http://morganisteconomics.blogspot.com/2011/02/why-treasury-and-bank-of-england-should.html

    The rate of inflation in the UK rose to 3.7% percent in December surpassing the Bank of England’s inflation target of 2%. This suggests the Bank of England and the Treasury should take actions to reduce pressure on prices in an attempt to reach the set target. The most obvious method of closing the inflationary gap is to increase interest rates. However this may prove counterproductive due the recent VAT rise to 20%, which will have a demand suppressing effect through the fiscal side of the policy mix. The full extent of the VAT rise on inflation has yet to be seen, as it has only recently been introduced. In addition to that a rise in the interest rate would have an extremely negative impact on long term growth and the property market. Not to mention the impact on existing debtors’ who will have to pay significantly higher interest rate repayments at a time of austerity.

    Further reason not to intervene with inflationary prices in the short term is the inflation has not occurred (at least not solely) from pressure in the domestic economy. Most of the price rises have been as a result of an increase in the price of energy (oil in particular) and shortages of food and other essential natural resources. This is partly as a result of a rampantly growing Chinese economy putting global pressure on resources needed to fuel prosperity. However it is likely the Chinese authorities will ease the speed of the growth to prevent the economy overheating, this will lower prices for the affected commodities in the UK (if it happens). In addition to that the larger world powers namely America, China and the emerging other BRIC countries are fighting for consumer demand. If this happens it is likely it will spark an international price war resulting in a currency war, when this happens the value of the currency is depreciated to attract foreign demand for the related countries goods.

    Therefore it is highly likely that the international factors that are creating the short term inflationary pressures in the UK are only temporary and that these same factors are also likely to pose the opposite outcome in the coming months. Although it is not possible to determine whether the currency war will start or more importantly when it will start, it is very likely to happen and sometime soon. It is also not possible to determine long term energy and other essential resource prices, but it is likely they will dampen in the short term. Due to the likelihood of a decrease in the international factors on UK inflation in the near future and the impact of the recent VAT rise on consumption it would be unadvisable to attempt to hit the 2% inflation target in the next couple of months. However, if inflation continues to rise after March or if the rate of inflation becomes excessively high (above 5%) action should be seriously considered.

    http://online.wsj.com/article/BT-CO-20110128-705312.html

    http://www.financemarkets.co.uk/2010/05/11/risk-of-china’s-economy-overheating-as-inflation-surges/

    http://www.proactiveinvestors.co.uk.../oil-prices-rise-after-us-gdp-data-25040.html
     
  2. I have another couple of posts ready. Can I ask is there any specific subjects you want me to post about.