A Bet For Sir Merv the Swerv

by Mitch Feierstein about 11 years 7 months ago

The price of strawberries is up this year.

The price of strawberries is up this year.


‘Inflation falls.’ That’s the headline countless British consumers have been longing to see. And inflation isn’t just falling: the Bank of England predicts that prices rises will be down as low as 1.7% some time later this year. If that’s true, it’ll be a blessed relief for countless consumers.

Personally, though, I’m just about able to contain my excitement. Yes, inflation is falling, but it’s still very high. Prices are still rising way above the Bank’s 2% target. What’s more, the Bank of England has consistently failed to achieve its target. Since the start of 2007, inflation has been almost permanently above 2%, twice nudging above the frightening level of 5%. Given that the Bank has been permanently wrong about inflation for years, I’m not placing too much faith in Sir Mervyn King’s latest boosterish prognostications.

What’s more, I don’t believe the inflation figures anyway. There’s too much massaging going on. Why, for example, does news attention tend to focus on the consumer price index (where price increases are currently running at 3.6%) instead of the retail price index (where price increases are growing  at 3.9% down from a stonking 4.8%)? After all, the retail price index includes house prices. Since, I assume, many of my readers live in houses, it seems reasonable to study an inflation index that includes the associated costs.

What’s more, back of the envelope type calculations focusing on what ordinary people actually spend have consistently suggested that inflation has been running way above published rates. Last December, for example, the Mail reported that the price of basic purchases, including food and fuel, had soared by 43% over ten years, far ahead of the published 27% increase in the CPI. These days, with wages stagnant and prices soaring, those essentials occupy a far larger and more important share of our shopping baskets than they ever used to. It’s probably the thing you personally think about when you think of inflation. Indeed, oil prices were $100 a barrel as recently as October; they’re touching $118 now. Petrol and utility bills are soaring.

Indeed, I’d like to take these thoughts further. I’d like the Bank of England to publish a regular Essential Goods Index. Rather than exclude items like food and fuel because they’re ‘volatile’, it would include them because they’re critical to most household budgets. When Sir Mervyn King writes to the Chancellor to explain why, yet again, he’s failed to meet targets, he might want to include a paragraph or two on what that failure means for ordinary households.

Indeed, while we’re on the subject of total transparency, I’d like the Bank to include data on asset price inflation. House prices, for example, have barely fallen in this recession, despite the fact that the number of houses being traded are at 27-year lows and unemployment hit a 16 year high toady. The FTSE 100 stockmarket index is nudging 6000, despite the fact that the outlook for the British economy is more precarious than it has been for decades.

These things are hardly hidden from view. The ratings agency, Moody’s, has placed the UK on credit watch for a likely downgrade of its AAA debt rating. That assessment simply mirrors the stark reality of our current predicament. Indeed, the extraordinarily low interest rates at which the British government is currently able to borrow – and of which George Osborne so frequently boasts – are simply the flipside of a crazy run-up in government bond prices.

Those things might sound remote from your ordinary life, but what we’re witnessing is the creation of yet another asset bubble – and a bubble in which the Bank of England is, once again, utterly complicit in creating. When that bubble bursts, as bubbles always do, the destruction inflicted on normal households and taxpayers will be prodigious. It’s that potential destruction which makes Moody’s – quite rightly – so anxious.

And, I’m sorry to say, I agree with Moody’s. I have no faith in the Bank of England. I don’t believe its headline inflation numbers. I don’t remotely trust its record on controlling asset price bubbles. And I’m willing to put my money where my mouth is. Back in 1999, Gordon Brown sold 400 tonnes of gold at around $377 an ounce. I bought some of it – and I’m pleased that I did because the gold price is now around $1730.

Posen promised to resign if UK inflation is not 1.7 by August

Posen promised to resign if UK inflation is not 1.7 by August

So here’s the bet. I’ll bet Sir Mervyn King one ounce of gold that inflation does not come down to 1.7% within the course of 2012. If I’m wrong, I’ll be happy to pay up, because that’ll be a sign that Britain – finally – might be returning to the path of financial probity. Somehow, though, I don’t think he’s going to take my bet. In the meantime, he shall keep writing monthly form letters explaining his failures to the Chancellor of the Exchequer.

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