Yesterday it was Ben Bernanke who tacitly handed over control of the global economy after the Federal Reserve’s base lending rates hit rock bottom – zero percent.
Today, Britain’s counterpart, Mervyn King, has admitted that he and the institution he represents – the Bank of England – no longer have control over inflation.
If Alastair Darling expects a letter from Merv to explain what the Dickens is going on with the Consumer Price Index, he’ll be disappointed. Merv has sovereign stamped his last letter on inflation for a while; he is suspending predictions during this period of “shocks and disturbances”.
Inflation is still persisting in spite of an eight percent fall in oil prices compared with October. But this will fall – of course it will as people spend less.
Mervyn King has recently come in for criticism due to what was perceived as dallying. If interest rates should now be at 2 percent, why were they at 5 two months ago? The answer is simple: ignorance is bliss.
It grates me as much as the next man whenever I hear Mr. Darling’s woefully optimistic predictions, but they have some merit. People who here that the economy is fine will be slightly more inclined to spend and, in turn stimulate growth (or at least stave off shrinkage).
Once you tell people that we are in serious trouble, they, for some reason, trust you. They stop spending on the anticipation that prices will fall further and deflation becomes a self-fulfilling prophecy. They must think you’ve got an economics degree or something.
Tagged: Bank of England, deflation, Fed, inflation, interest rates
