ANALYSIS: WHY MERVYN KING IS WRONG ABOUT UK INFLATION.


Mr King is ignoring the European dimension

Look at US, Australo-Pacific and even some EU business websites at the moment, and you’ll note a strong whiff of concern about Bank of England head Mervyn King’s airy dismissal of accelerating British inflation as ‘temporary’. Many of these (including this writer) would like to have the ‘temporary’ assertion (a) given some rough timescale and (b) backed up by serious evidence.

King’s main contention in support of ‘temporary’ inflation is based – in his own words – as “unused UK production capacity delivering more goods than demand, thus acting as a brake on inflation”.

The BoE chief isn’t stupid, but that analysis is bollocks, and he knows it. But Mervyn King’s job right now is to prod the politicians awake with occasional reality checks…..while calming the markets as to the survival chances of the victim in the basket. As you’d imagine, this is a very tricky process given the largely uncharted nature of Britain’s econo-fiscal minefield.

But beyond spin for the gullible, Merv the Swerve will be well aware of the following:

1. Slightly stimulated production output’s raw materials have been paid for with a falling currency – thus producing higher costs. That isn’t going to deliver deflation to our High Streets – nor is it going to make our exports more competitive.
2. The coming austerity programme will undoubtedly be deflationary because it must depress domestic demand. But this will slow down the economy, increase unemployment, and therefore indirectly produce inflation as welfare costs rise, and confidence in Sterling falls further.
3. Britain’s trade deficit may have ‘settled’ last month, but it has settled at an alarmingly high percentage of gdp. In terms of British currency reserves, a continuation at this level for even six to nine months is going to give us an image as ‘Germany 1923’ among currency dealers.
4. A Pound still ahead of a toilet-paper euro isn’t going to help anyone except Brits holidaying in the EU, as we don’t buy much raw material in the eurozone. It will, however – even with globally depressed demand – take our raw material costs even higher from Asia, Australasia and South America….especially if China floats the Yuan.

Economically, King is right that the current situation in terms of global economic growth and eurozone meltdown are neutralish is terms of inflation rate.

But the deficit, the declining Sterling value beyond Europe – and the EU’s increasingly arrogant determination to use UK monies whether we like it or not – suggests a massively inflationary outlook.

The EU and the British Government are steaming towards an obvious head-on collision at the moment: as the Slog said last month, Hague’s first flight as Foreign Secretary went in entirely the wrong direction. Perhaps William is already grasping the profound pit of incompetence that is our FCO; either way, he is clearly aware at last that a controlling Brussels mafia led by Herman Van Rompuy is the biggest obstacle to British recovery – and it must be both challenged and broken up.

Later today, The Slog will attempt to wake up at least some of Britain’s opinion leaders to Rompuy Reality: we have lampooned him as a figure of fun, and thus gravely underestimated the man.