Belfast Telegraph

Sunday 21 December 2014

Surprise, surprise, there may be trouble ahead

There were a few economists wiping their brows yesterday.

The fall in UK inflation, even if it was only by a paltry 0.1%, came as a shock to the vast majority of people who would have bet the house (particularly if it was in negative equity) on the consumer price index (CPI) showing the kind of increase which would send our disposable income down the plug hole.

Not so last month.

Clothes were said to be behind the slide in the headline index with the shirt on your back seemingly not costing as much, or at least not rising in cost as much, as it had.

But aside from that the building blocks had been in place for inflation to ramp up and there are many people scratching their heads in wonder as to why it didn't.

We've experienced higher food prices, higher fuel costs and another month when the government has been pushing so much cash into the economy its a wonder the price of banknote paper hasn't spiked.

And ironically with inflation seemingly "under control", the Bank of England is now likely to launch the next round of quantitive easing to try and get the economy back into proper shape.

Worriers out there - and there are a lot of us - think that might be dangerous, mainly because the time lag which dogs economics means it doesn't look as if we've seen the effects of all the above inflation contributors.

If the Treasury goes ahead with another round of QE at the same time as high food and energy prices seep through to the CPI then there's a good chance that inflation could head north faster than a swallow in spring.

But that's the risk it runs and the top bods on the Monetary Policy Committee are well aware of the juggling game they are part of when they interfere in the money supply.

Their modus operandi is to keep inflation at 2% but by printing money their other eye is also on getting the economy back up to speed and that might distract them from their real job.

The Bank of England certainly isn't on its own in getting the printing press running again and follows in the footsteps of the ruling by a German court which paves the way for European QE and last week's announcement by the US Federal Reserve that it's going to pump a massive $40bn (£24.5bn) a month into its struggling economy.

These are all pretty drastic moves to get the money supply moving again. Let's just hope they work.

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