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No need to worry about inflation

Ed Bowsher
by Lovemoney Staff Ed Bowsher on 23 March 2010  |  Comments 10 comments

It's fashionable in some quarters to fret about rising prices, but today's inflation statistics show there's no need to lose any sleep on this. Interest rates will probably stay low for some time to come.

It’s a good news day! Today’s inflation numbers were pleasing. The Office of National Statistics said this morning that consumer prices rose 3% during the year to February – that’s a bit lower than the consensus forecast at 3.1%. What’s more, it’s a healthy fall from January’s figure of 3.5%.

A big driver of the fall was low prices for computer games and toys. Price rises for books were also low – especially for non-fiction books.

What does this mean for us?

Well, it’s good news if you’re a borrower, not so good if you’re a saver. Lower inflation means that we’re less likely to see big rises in interest rates any time soon. I’d be very surprised if the base rate was higher than 1% at the end of this year and it could be as low as 0.75%.

There are many pundits out there who see inflation as the big worry at the moment. I’ve said several times that I disagree. I’m more worried about our economy returning to recession. The reality is that there is spare capacity in the economy and pay rises remain subdued. Yes, commodity prices are rising, but I don’t believe those rises are enough on their own to spark a big climb in inflation.

Today’s news only strengthens my view that there’s no need to worry about inflation in 2010 and there probably won’t be any need to worry about it in 2011 either.

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Comments (10)

  • toxicchili
    Love rating 0
    toxicchili said

    I disagree. For starters, I don't accept that inflation is purely

    caused by the money supply. Most monetarists accept that the velocity

    at which money moves round the economy also affects inflation. Then

    non-monetarists look at other factors. Such as the output gap for one.

    Yes thats true, but I was mearly stating the point that using CPi and RPi as a guide to real inflation also isn't accurate.

    At the moment, I agree, I don't see inflation as the major threat. I think there are far more important things that need to be addressed as well. For example our weak pound and the governments obsession with keeping house prices at an unaffordable level. I personally don't see a recession as a particularly bad thing, it is more a way of the economy correcting itself, you can't have boom years without a bust at the end.  Yes its painful for some, but often it is better to rip the plaster off quickly instead of slowly pulling it off and drawing out the pain.

    What I find frustrating, is that much of the government and BoE policies and actions seem to be to protect people who have large debts and overstretched themselves, yet people who have been sensible our bing punished. Business who have been reckless i.e. Northern Rock, HBOS, etc.. are being protected at the cost of business who have acted responsible and been careful how they operate.

    Report on 25 March 2010  |  Love thisLove  0 loves
  • Ed Bowsher
    Love rating 76
    Ed Bowsher said

    Hi Toxicchilli,

    Good we agree more than I realised! :) I agree that the government shouldn't be trying to keep house prices at a high level. The thing that first-time buyers need above all else is lower house prices, not tax breaks on stamp duty.

    We're not too far apart on recessions either. I think they're inevitable. Not pleasant but inevitable.

    Re the weak pound: I'm agnostic on this. I accept that it could spark inflation, and it's not good for people who travel alot or own property abroad. On the other hand, it will help exports and could boost some of the non-financial areas of our economy.

    Re protecting the overstretched: yes, I can understand your frustrations on this. I think the government had to protect some of these businesses, and indeed some individuals. Because if the banks had gone bust, or large numbers of individuals had gone bust, that would have damaged the economy as a whole and the prudent would have suffered too.

    But I think the government could have been tougher with the banks once the crisis was over. And I can understand why so many people are angry on this.

    Regards,

    Ed

    Report on 25 March 2010  |  Love thisLove  0 loves

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