Laban Tall, fancy earning £20 for your favourite cause?

Laban, understandably, is rather annoyed with the Bank of England’s apparent inability to hit its 2% inflation target. Lets remind ourselves, the Retail Price Index is at 5.6% and the Consumer Price Index is at 5.2%. Laban scoffs at the idea that inflation will fall significantly in 2012 whereas I think it is incredibly likely that it will, even with the bank printing up another £75bn in freshly minted electronic cash. Only one way to settle this, I propose a bet.

I reckon inflation won’t average above 2.5% and I’ll donate £20 to anyone Laban wants if it does. If Laban will take the mirror of this bet we have ourselves a deal.

As far as why I’m so confident, this morning’s post explained why QE is a good idea when an economy is depressed and Luis‘s explains why QE isn’t really too different from your common and garden interest rate cut. I’ve already covered why temporary factors are what is to blame for elevated inflation, factors which are unlikely to be repeated:

One major source of inflation has been successive increases in VAT. In the last two years it has increased from 15% to 20%, adding at least a percentage point to inflation. A lot of inflation is also still working through import prices since sterling devalued. Lastly, crisis in Europe and continued depression in the US means the UK’s economy can expect little external support.

And finally Paul explains why inflation is unlikely to rise next year; nobody has enough money to keep it going…

Here’s the key graph, from the Office of National Statistics:

Like the US, Britain has no wage-price spiral — wages are going nowhere.

Plus we have continued contraction of the state sector which will cause people to be unemployed, to lose their services, and will have various knock on effects through the rest of the economy. Unlike Hopi I am not worried that we will soon need to battle inflation, inflation will splutter down on its own to a more comfortable rate.

So, Laban, that is why I am not worried about inflation. Would you like to take me up on my bet?

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6 thoughts on “Laban Tall, fancy earning £20 for your favourite cause?

  1. That “average 2.5%” is quite a big shout, given that higher utility bills will stay in the CPI data until Q4.
    That said, inflation should fall next year simply as higher oil/VAT/food prices drop out of the numbers. To argue for higher inflation, you have to either expect commodity prices to rise sharply, or some swift and powerful base money/expectations effect. And I’d like to see the well-fitted empirical model that generates either.

  2. You should *want* much higher inflation than 2.5% next year, because we all want the BOE to set a nominal GDP level target way higher and shoot for the moon. If they do the right thing, it’ll probably bring another inflationary bounce.

    If they don’t spell out an actual specific target (nominal GDP level, price level, currency level, whatever), I would agree with Chris that inflation is likely to be much below 2.5%, as nominal spending will collapse again.

  3. Well, it depends, Gareth. I’d want as little inflation and as much real growth as possible.

    If there’s a regime change and the BoE, Fed and (yeah…right) the ECB adopt NGDP targeting, level targeting then I’ll probably lose the £20 bet to Laban (if he takes it), but I’ll be more than £20 better off in other ways.

    1. A noble bet, then. I applaud you.

      We do also get supply-side changes in 2012 which should support the CPI; fuel duty in January and student loans in September. Mervyn King will get tired of saying “temporary factors”.

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