Inflation hits 3.7% - King changes his tune

Today's inflation figures show that CPI has hit 3.7%,  1.7% above the Bank of England's target rate of 2% and since January an increase of nearly one percenatge point.

What's interesting is that back in January, when I was clearly wrongly saying that an interest rate of 2.9%, (The result of the biggest single one month rise in history of one percentage point) was bad news for Labour's re-election, Meryn King was saying that interest rates would almost certainly have to rise to control it. Not only that but that the patience of Britons would be "sorely tried" as a result of stagnant pay and a real terms decline in living standards.

Fast forward to today and with interest rates at an even higher level is he saying the same thing? No he's silent and the MPC have again voted to keep interest rates where they are. In fact he has been arguing that the current level of inflation is a blip despite evidence showing it clearly isn't (Thanks to Spectator Coffee House for the graph).

The big question though is why is there no government reaction to the continued failure of the MPC to hit their legally mandated  2% target. In fact the PM's spokesman this morning said that he had complete confidence in the MPC. There are two ways you can look at the government's silence on this issues either:
1) They support the MPC's position to keep interest rates low and agree to risk inflation running away in order to prop up the housing market and give the economy a false boost (a dangerous game)
2) They really believe that interest rates should be the domain of the Bank of England and not politicians so believe that they must support them and trust their judgement on the matter.

Of these I think option two is the least worst of two evils, but it's hardly a poplicy for a stable economy.

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Inflation, interest rates, credit ratings and unemployment, June election?

Inflation
Yesterday’s news that CPI (Consumer Price Inflation) has risen by the largest one month amount in history, from 1.9% to 2.9% is far from good news for the economy and for Labour’s chances of getting re-elected.

Interest Rates
Mervyn King then bumbled along and pointed out that it may well rise above 3% (it’s only 0.1% away and went up by ten times that in one month so I think it’s a fair bet) and that interest rates will have to rise to control it. He also helpfully pointed out that this will all the patience of Britons who will be “sorely tried” as a result of stagnant pay levels and a real terms decline in living standards.

Credit Rating
At the same time the credit ratings agency, Fitch, has said that the government's plans to reduce the deficit by half within four years aren’t gutsy enough and that if it doesn’t see further spending cuts then it will be doing some cutting of its own by reducing the UK’s much vaunted triple A credit rating.

Unemployment
To top this off today will see the announcement of the latest unemployment figures which are expected to see around 2.5 million people unemployed. However this raw figure hides the real picture of how difficult the job market is with 18.4% of people aged 18-24 being unemployed as opposed to 6.3% for 24-49 or 4.5% for the over 50’s. So unemployment figures are actually hiding something quite interesting, that through this recession people may not have been losing their jobs in the same numbers as in previous years but companies simply haven’t been hiring young school, college and university leavers. Jobs are probably being dropped by that fantastic phrase “natural wastage”.

Election?
So with inflation sky rocketing, interest rates about to go with them, the country’s credit rating in real trouble and unemployment at a new high, how likely do you now think a March election is?
With Gordon Brown’s election strategy seemingly being that he wants to be able to say “look we got us out of this recession that we got us into” he needs good positive economic news before he can call one. If the figures don’t pick up soon then I think he may well see a drubbing at the local elections as not as bad as the economic state of the country and stick it right out until June. Anyone want to place bets?

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