Sweden has outperformed Britain over the last few years because its central bank has been more inflationary than ours. David Smith says the opposite in discussing why Sweden has had an economic recovery and Britain has had stagnation and that concerns me.
Second, inflation matters. Falling inflation is the main hope for a sustained recovery in consumer spending, as the growth in real incomes is restored. The Bank lost control of inflation – it would argue because of factors outside its control – and the ecnomy has suffered in consequence. At the very time low inflation was needed, it was not achieved. We have to hope things will be different from now on.
This doesn’t really make any sense. In one way you can understand falling prices as “getting richer” and of course this would tend to make people buy more things. In another, much more useful and common sense of the word, inflation means prices and wages and rents increasing. This doesn’t necessarily have any particular effect on consumer spending one way or the other.
David praises the efforts of the Swedes in producing a strong recovery and low inflation. Hmmm… Here are the CPIs of Sweden and the UK.
Two things stand out for me.
First of all, both countries have experienced very similar inflation trajectories but the UK’s VAT rate changed thrice in the last few years. First down to 15%, then to 17.5% then to 20%. The Swedes on the other hand have had a 25% VAT since 1990. This gyrating VAT has made it appear that monetary policy has been running hot when it has in fact been too tight since 2008.
Secondly are the dips at the end. Now both the UK and Sweden’s inflation rates are falling both their economy are slowing. The UK from stagnation to decline, and Sweden from recovery to a stall. This is in direct contrast with David Smith’s argument.
Rather than too much inflation, we have too little. The UK is tightening fiscal policy rapidly and this is making people poorer because the monetary authority is not adequately offsetting this, as admitted by Adam Posen who should know.
The UK suffers first and foremost from a deficiency of demand. While I applaud David Smith for trying to take lessons from foreign countries he is misinterpreting the data.
Filed under: Economics, Adam Posen, David Smith, gdp, Sweden, UK
Really nice graph. We’ll be fine so long as oil prices don’t start going up again, then.
I do wonder what would have happened without a commodity price spike in 2008. Strange to think what would have happened, perhaps could have avoided this mess completely.