Here comes UK inflation

Fraser Nelson in The Spectator asks 'How much bigger does Britain's inflation have to become before Mervyn King realises it’s a problem?' and explains why it is a problem. I have been a big fan of Fraser Nelson's writing for a while an this is a great one. Here's a short extract but do read it all:

'3. The Bank of England is fanning the flames of inflation with base rates at an absurdly low 0.5 percent. This implies that the British economy needs a fiscal life support machine. In fact, Britain’s economy is projected to grow by a very respectable 2 percent this year: our manufacturing sector reported the sharpest upswing in 16 years. Exports are doing pretty well. There is no justification in such low rates – especially with inflation so high. On the tube last night, I saw HSBC offering to lend me money at 2.3 percent a year. This is less than inflation; a real-terms negative interest rate. So, I’m being paid to borrow. They should plaster this sign at HSBC branches to tell robbers: it’s okay. You don’t need a gun. HSBC is offering people money for free. Precisely the craziness that landed us in the mess the last time.

...

5. Mervyn King seems to specialise in seeing no evil. The Governor did not notice that Britain was incubating a debt bubble the first time around, nor does he appear to notice a new one inflating. You’d think that he’d be making speeches galore about the limitations of inflation targeting, given that massive problem identified it in. By obsessing on CPI, he nurtured an asset bubble in Britain – and did so by needlessly fighting a benign deflationary shock. It is staggering just how little analysis there has been. As Johan Norberg argued last week in a powerful cover story, the crisis was caused by record-low mortgage rates, and debt-fuelled spending. To cure the crisis, the Bank of England has prescribed record-low borrowing rates, and debt-fuelled spending. The Bank seems not to have paused to consider that its ‘solutions’ are the same vices which caused the crisis in the first place. '

But the one that scares me the most is the one that I have been 'banging on about' for a while:

'7. If Mervyn King and the Bank of England is trying to inflate its way out of a debt crisis, we should be told. It’s a fairly well-establish tactic (especially in countries that finance government splurges by printing bank notes.) What happens is this: policymakers pretend to fight inflation, so feign surprise each month by how high inflation is. Then, they blame it on a short-term blip. But you soon lose your credibility – and, fatally, this is starting to happen to King. Already, the markets are beginning to price in the cost of inflation to gilts. From the Café Nero owner to the Japanese hedge fund manager, word is getting around: Britain is letting inflation rip. '

This could get bad, very bad, very bad indeed!