Pump It Up (When You Don't Really Need It?)
The BBC managed to get awfully excited by yesterday’s inflation figures; both Five Live and Newsnight led on the news that the Consumer Price Index had risen, from 2.1% to 2.2%, while the more widely trusted Retail Price Index had also gone up, from 4% to 4.1%. Cue doom and gloom all round.
But is that it? Inflation up by 0.1%, leaving the CPI at just 0.2% over the government’s target? If the inflation rate had risen by any less it wouldn’t have risen at all. Jackie Long on Newsnight preceded her report by stating, “in some ways, today’s official inflation figure could have been read as a bit of good news”. “But we decided to run with the story anyway”, I interjected, finishing her sentence for her. And fair enough; no doubt the guests were booked in the studio, the bulk of the report had been filmed, and we don’t want to be wasteful when there are some potentially straitened times ahead.
I don’t want to sound complacent, I appreciate that the economy is in a tricky position just now, and that while inflation, unemployment and interest rates are still historically very low there are storm clouds on the horizon, with concerns over commodity prices, the knock-on effect of the slowdown in the US, and the amount of personal debt in the UK economy; but still, talk about talking ourselves into a recession before it has even happened.
There are a couple of things I could do with being answered, though, by anyone out there with the requisite knowledge. Whilst I acknowledge that the state of the public finances is a concern in itself, what is all this talk bemoaning the way it is restricting our ability to use fiscal policy? For years monetarists have told us that we shouldn’t use fiscal policy at all, even if we are in a position to do so. That always seemed a bit daft to me; after all, changes in taxation have a fiscal effect even if you don’t want them to. Now, however, not only is fiscal policy seen as desirable but almost magical, as if any tax cuts or increases in public spending will only have the wished for effect in stimulating demand without adding to the inflationary pressures that are already a worry and inherent in the world economy. So what’s going on there?
Secondly, if part of the concern at the moment is the high level of personal debt and the bubble in the housing market, themselves a consequence of the low interest rates we have enjoyed for so long, is it really a good idea to cut interest rates still further in response? Isn’t that a bit like reacting to the sight of an over-inflated tyre that is leaking air and looks as if it is about to burst by pumping in even more air, when really we should be looking at releasing some of the pressure through the valve? In other words, rather than calling for a frantic cutting of interest rates and considering fiscal stimulus packages, shouldn’t we just accept that a slowdown will have to happen at some time, that it may well be happening now, and that rather than strive to prevent it or delay it just so it can wreak even more havoc another day we should prepare for a downturn, perhaps even for some sort of recession, and we should be putting our efforts into engineering as soft a landing as possible?
Or have I just demonstrated why my career in economics stalled abruptly on my graduation day?