Inflation Warning

The fear of a double dip recession  is mis-placed, not because there will be one, but because, in the big picture, it does not matter if there is. What does matter very much is not getting the re-modelling of the economy properly completed. Without that there will be no lasting recovery. Moreover there will be another crisis.

A key pillar of the economic model and therefore the recovery is low inflation. This is more important than very low interest rates. The latter are two edged because they hit the spending power of savers.  By contrast low inflation encourages investment and enables efficiency savings to translate into reduced costs. This is very important for an export and manufacturing led recovery.

It therefore becomes an absolute priority for the MPC to act now. Further delay, splits and vacillation are no longer possible. Already RPI is edging to 5%. Once inflation gets above 4% it becomes impossible to control with interest rates, unless penal levels are applied, which would trigger a double dip anyway. The arguments of the do nothing now/quantitative easers are dangerous. So are the delay the cuts pleadings. There is a problem. It must be fixed. Fudging is not fixing.

Failure to act will put at risk all that has been achieved thus far and may well result in final levels of borrowing beyond the realistic capacity to repay. Ireland is already there. Default by another name is actively considered in Europe’s finacial corridors. The U.K’s ability to service its personal and national debt assumes economic growth in real terms. Rising costs, because inflation has taken off, will kill a manufacturing and export led recovery, increase unemployment and suck in cheaper goods from overseas. The whole  recovery plan will be wrecked.