If you haven’t got any gold, stock up on baked beans, because inflation is coming back. Data released this morning from the Office for National Statistics showed inflation in the UK rose for the second month in succession to 1.9% in November, jumping from 1.5% in October. This rise in inflation is far stronger than consensus economists were expecting. Guido will bet a large amount of money that the Governor of the Bank of England will have to write to Chancellor Osborne next year telling him why inflation is over-shooting target.
Not hard to figure out why when the government has printed the money to buy all the billions in government gilts offered this year. Take that in, the net effect of printing all that money via quantitative easing was to prop up the government’s debts. Andrew Lilico at Policy Exchange is equally as pessimistic as Guido, he is predicting 2 quarters of anemic growth, followed by 2 quarters of contraction next year and double digit inflation to follow by early 2012 – a double dip. Double digit inflation and probably a recession in 2013 – stagflation.
Lilico calls the failure of Darling to use the PBR to tackle the deficit sooner rather than later a “nihilist fiscal policy”. There has been some argument made by left-wingers that the ‘AAA’ rating is not really under threat and that it is just political scaremongering by George Osborne to claim otherwise. The fact is that the markets have already removed the triple ‘A’ rating before the ratings agencies. In terms of the interest rate paid and implied risk premium for UK debt, gilts trade like double ‘A’ countries – Japan, Portugal, Ireland – rather than triple ‘A’ countries like Germany. As a result, the cost of servicing UK debt is already 20% higher* than it is for Germany despite £200 billion having been thrown at keeping short-term rates down, not surprising when the UK leads the G20 in having the highest inflation and worst indebtedness.
*Market rates today for UK 10 year gilts 3.90% against 3.24% for German 10 year bunds.