Tuesday, 12 April 2011

Inflation by Nation

For much of last year UK inflation was substantially higher than in other analogous countries, the US being a prime example. This was obviously the subject of some debate as there were any number of possible causes involved and disentangling the ones which were unique to us, or which at least played out significantly differently with us was difficult. There were, in a sense two opposing views on this.

The first was perhaps the loudest, and that was stagflation; a return to high inflation and economic stagnation. Given the bad growth figures and loose monetary policy this was perhaps understandable, but then, loose monetary policy in and of itself is hardly a rare thing just now. Most evidence is that monetary policy is deceptive because aggregate lending took a huge dive since the initial crisis.

The other thought is that: the UK has devalued its currency competitively and UK employment remained higher than in the US by 2%, and for the first half of last year growth was still reasonable, and this allowed some price resilience in the face of a falloff in demand. This is after all the key point, this isn't an inflation question, it's an inflationary pressures vs deflationary pressures question. We're leaving, or struggling to leave a situation where credit levels were collapsing, unemployment surging and spending power declining, and none of those things actually support high prices.

With inflation dipping today, the Bank of England may feel vindicated in keeping rates low. After all, this is an early sign that inflation is not locked in, and that the resilience of the consumer in the face of higher prices is declining. We're now staring depressed aggregate demand in the face much more squarely. And the cuts have yet to really kick in.

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