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We've had a permissive approach to inflation for a number of years. It might be about to become formalised.

By Tim Montgomerie
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"Inflation is the crabgrass in your savings" - Robert Orben, presidential speechwriter

Crabgrass grows in the late spring. Individual crabgrass plants can then extend to twelve inches in diameter during the summer. They then die, leaving a large void in your lawn.


We've had a lot of inflation in recent times. Here's a graph noting the CPI inflation rate over the last six years. Price inflation has consistently been above the Bank of England's target range and nearly always above the middle of the Bank's target range for inflation. The negative consequences for people with savings and property owners are obvious. They positive consequences for households and governments with large debt stocks are equally evident. If you are a government or an electorate that lacks the will to cut your income or cut your spending then you turn to inflation. "Inflation", decreed Milton Friedman, "is taxation without legislation." 

CPI graph

Will the new Governor of the Bank of England crack down on inflation? Will Mr Mark Carney reverse the permissive approach of Mervyn King? Will George Osborne demand that he does? It looks unlikely. In remarks earlier this week Mr Carney suggested that central banks shouldn't necessarily be so focused on inflation but might focus on what is called nominal GDP targeting instead. This change would probably mean that interest rates could stay lower for longer - a strategy that might accommodate more growth and more inflation. John Redwood is worried. "There would be dangers," he writes, "in signalling that the Bank under new management no longer wished to even pretend to curb inflation, in an economy which can be inflation prone."

Yesterday, in remarks to the Treasury Select Committee, Mr Osborne refused to say whether he had spoken to Mr Carney about changing Britain's inflation regime. He insisted that his private conversations with Mr Carney should remain private. He did, however, open the door to a new approach although he added that the case for any change would need to be "pretty strong".

The idea of a shift in Britain's inflation regime is said to be supported by Vince Cable. America has recently adopted a nominal GDP target and Japan is considering changing its regime. Abandoning the Bank of Japan's hawkishness on inflation has actually become a central issue in Japan's imminent general election. Shinzo Abe - the likely new premier of Japan if polls are accurate - wants to double the inflation target from 1% to 2%. That, in the Japanese context, is political dynamite. A large number of Japanese politicians have made repeated attacks on the BoJ Governor, Masaaki Shirakawa, for not doing enough to stimulate their economy and end a decade of near stagnation. "Luckily," Mr Abe has said, "the BoJ governor will change next year." Many Japanese people worry about this unprecedented criticism of their central bank. Those sat on large savings or in large properties fear that a doubling of the inflation target will only be the first attack on the BoJ's independence and other attacks will follow.

Overnight S&P joined Fitch in wondering whether George Osborne has the determination to get on top of Britain's debts by cutting spending or raising unpopular taxes. There are good arguments for GDP targeting (see Paul Marshall in today's FT) but it might also provide the best backdoor way of inflating away Labour's debts. Watch this space.


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