Faithful readers know that in the inflation/deflation debate I side solidly on the side of looming inflation.
We may go through a period of deflation first... but inflation is coming: guaranteed.
That's why I note today's decision by the Bank of England to keep interest rates at historic lows.
Bank of England Governor Mervyn King has announced he is setting aside his inflation target to protect the economy from the biggest budget cuts since World War II.
And this action is taken as a split widens on the nine-member British Monetary Policy Committee (MPC) on the danger posed by rising prices. Resisting calls to increase interest rates, King insists it may be a “considerable” time before the benchmark interest rate of 0.5 percent returns to “normal.”
Prices continue to rise in England and King is tolerating faster inflation as Prime Minister David Cameron’s push to slash the Group of 20’s largest budget deficit threatens to hurt the economic recovery. Policy maker Andrew Sentance, for now the only advocate of higher rates, counters that growth is solid enough for the bank to withdraw emergency stimulus.
Inflation has exceeded the bank’s 2% target since December.
“King is willing to take risks with inflation,” said Steven Bell, chief economist at London-based hedge fund GLC Ltd. and a former U.K. Treasury official.
The combination of persistent inflation and budget cuts has widened the debate about when to raise rates in England.
Sentance voted for higher rates at the last two meetings of the MPC. And while there are calls for the central bank to be “incredibly vigilant” on prices, inflation was allowed to rise to 3.2% in June and has exceeded the government’s 3% limit since March.
King said last week the rate is likely to stay above the bank’s target “for much of next year”. King “sees no need to try and offset what is likely to be rather a temporary continuing overshoot,” said former Bank of England policy maker Charles Goodhart.
Fears of continued recession have economists and central bankers eager to ignite inflation and King's actions are sure to be echoed in North America.
Goodhart says officials may find it hard to justify their actions after a “pretty poor” forecasting record in the past two years.
With the inflation overshoot set to persist. Goodhart make an interesting observation.
“In a sense we’re in the worst possible situation, with inflation above target and output growth well under target.”
Meanwhile, on the real estate front in Vancouver
Check out this Global TV clip on the declining real estate sales environment.
How desperate is the climate getting in the industry?
At the end of the clip we have our favorite downtown huckster, Ian Watt, actively encouraging buyers to start pitching low ball offers to undercut asking prices.
Will wonders ever cease?
(hat tip to Observer in yesterday's comments)
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