Not so long ago, what with the pound’s post Brexit falls, and producer prices shooting up across the world, many expected UK inflation to howl in rage, like a hungry wolf, ravenous for higher interest rates. Instead, it whimpers like a mildly discontented puppy.
And see this in the context of quantitative easing, since the finance crisis of 2008, the Bank of England has turned up the virtual printing press, and bought £435 billion pounds of government bonds, and £10 billion of corporate bonds. Woe is us, said the critics, inflation will be the result, it will be like the Weimar Republic in 1920s Germany, money losing value, precipitating a rottweiler of a crisis.
Instead, despite big falls in sterling, we get inflation of just 2.6 per cent.
NIESR’s Head of UK macroeconomic forecasting, Amit Kara commented that: "We expect inflation to rise further over the course of this year and to reach a peak of three per cent in the final quarter of 2017. Thereafter, we see inflation falling back towards the target rate of two per cent.”
Then again, sterling also fell some more after the June 2017 election, that may lead to another inflation spike, but it will surely be short lived.
Yet, low as inflation is, rises in wages are even lower. Expect real wages to carry on falling for some time. Then again, there is some good news on that front, at least if Paul Hollingsworth
UK Economist at Capital Economics is right. He said: “The squeeze on consumers’ real incomes should be neither as prolonged nor as severe as after sterling’s last major depreciation in 2008.”
All the same, that fact that despite inflation remaining so modest, real wages continue to fall, tells us something pretty negative about the UK economy.”
At some point, policy makers and governments will realise that something big is going down. That no matter what they do, inflation remains as big a threat as a pug on a lead.
Dog darn it, inflation has been licked, and that means policy makers need a quite different response.
And it has been beaten because, thanks to ageing, thanks to technology boosting corporate profits at the expense of wages, and thanks to rising inequality – which is also probably due to technology and not immigration, otherwise how do you explain rising inequality within countries such as China that have low levels of immigration? – global demand is low, and way lower than potential output.
The fix will come in the form of banks ditching QE, and funding a money drop instead – maybe distributed in the form of universal basic income – until that happens expect inflation to maintain its hang dog expression.