Stop worrying about inflation

It will go away but the danger of deflation remains.

It still looks a little early to me for the majority to swing and it would bring down a torrent of criticism on the Bank's head. But if not this week, then May, when the Bank will have the benefit of first-quarter GDP figures as well as other data, is beginning to look like a racing certainty.

A rate increase in May, when the Bank of England's Monetary Policy Committee produces its next inflation report, is looking like a given, says David Smith* in the above quote from his Sunday Times column (£).

For that to happen, there would have to be a major turnaround in the economy, which does not look likely, to say the least. The problem is that consumer and business confidence has collapsed, net trade is still negative, unemployment is rising, youth unemployment is on course to hit the million mark along with falling house prices and growth was negative in the fourth quarter.

I agree with Smith, though, that there will not be a rate increase this week.

With the economy in its current state, such a move would be a disaster and would likely have to be quickly reversed, perhaps even by the Chancellor with his powers under the Bank of England Act. Far from enhancing the MPC's inflation-fighting credibility, as the MPC members Martin Weale and Andrew Sentance have claimed, there is every possibility that such a move would be a death sentence for the MPC.

Keeping rates down as low as possible and hoping and praying and crossing all of his fingers and his toes that the MPC will do more quantative easing is Osborne's only plan B. A rate increase would mean he -- and probably the coalition -- would be finished. (May, by the way, is Sentance's last meeting and Osborne is unlikely to renew him or replace him with another hawk.)

The Bank of England governor, Mervyn King, has it right. The MPC needs to focus on the inflation that it is able to impact. Contrary to what Sentance has been foolishly claiming for months, inflation today or next week or in six months time is completely irrelevant for this week's MPC decision because it takes interest-rate adjustments about 18 months to feed their way through. The current inflation forecast of the MPC is overly optimistic and may well get revised down this month in light of the bad GDP numbers. Even with that forecast, inflation is well below target. Any rate increase would, in all likelihood, push the economy to deflation. The MPC's new inflation forecast, out next week, will show that inflation will be below target at the forecast horizon.

I have considerable sympathy with Professors Arestis and Sawyer, who argued, in a letter to the Financial Times last week, that the inflation we are experiencing has not been caused by excessive demand and that it would be nonsensical to reduce demand to "solve" it. They wrote: "It has long been recognised that, at best, interest rates by pushing down demand could address demand-push inflation and that they would be helpless in the face of cost-push inflation. At the present time, demand is still low in the UK and clearly significantly below capacity. The pressures on inflation are coming from higher world oil and food prices, value added tax and other tax increases and delayed effects of depreciated exchange rate. It is then clear that raising interest rates has no role to play in bringing down inflation." "No role" may be a bit strong but they make a good point.

I would go one step further and argue that the whole idea of targeting CPI inflation has failed. At the very least, the MPC's mandate should be extended to include growth and employment. The inflation measure should include house prices or could just simply be raised to 4 per cent. As I have said many times, happiness research shows that unemployment hurts people much more than inflation, especially now.

Inflation is going to collapse in 2012 when the impact of the one-off increase in VAT, oil and commodity prices and the exchange-rate depreciation mechanically drop out of the inflation calculations. As Mervyn noted in his recent speech, these three items alone account for 3 per cent of the current 3.7 per cent CPI inflation rate.

Inflation is going to go away because of the big output gap in the economy, simple as that. The danger of deflation, however, remains. Unemployment is rising and unless things improve quickly, any increase in rates would send the economy into a downward spiral as the effects of the VAT increase and spending cuts hit home. In all likelihood, Adam Posen is going to prevail and, by the summer, the MPC will be forced to do more QE. David Smith's racing certainty is likely to fall at the first fence.

*By the way, David, what ever happened to your building skip index? Presumably there aren't many around since the house price crash and the lack of availability of credit.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

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Charlottesville: a town haunted by the far right

Locals fear a bitter far right will return.

On 12 August, a car ploughed down pedestrians in the street where I used to buy my pecan pies. I had recently returned to London from Charlottesville, Virginia – the scene of what appears to have been an act of white supremacist terrorism – having worked and taught at the university there for four years. While I unpacked boxes of books, the streets I knew so well were full of hate and fire.

The horror began on the evening of Friday 11 August, when thugs with torches marched across the “Lawn”. Running through the heart of the university, this is where, each Halloween, children don ghoulish costumes and trick-or-treat delighted and generous fourth-year undergraduates.

But there were true monsters there that night. They took their stand on the steps of the neoclassical Rotunda – the site of graduation – to face down a congregation about to spill out of St Paul’s Episcopal opposite.

Then, on Saturday morning, a teeming mass of different groups gathered in Emancipation Park (formerly Lee Park), where my toddler ran through splash pads in the summer.

We knew it was coming. Some of the groups were at previous events in Charlottesville’s “summer of hate”. Ever since a permit was granted for the “Unite the Right” march, we feared that this would be a tipping point. I am unsure whether I should have been there, or whether I was wise to stay away.

The truth is that this had nothing to do with Charlottesville – and everything to do with it. From one perspective, our small, sleepy university town near the Blue Ridge Mountains was the victim of a showdown between out-of-towners. The fighting was largely not between local neo-Nazis and African Americans, or their white neighbours, for that matter. It was between neo-Nazis from far afield – James Alex Fields, Jr, accused of being the driver of the lethal Dodge Challenger, was born in Kentucky and lives in Ohio – and outside groups such as “Antifa” (anti-fascist). It was a foreign culture that was foisted upon the city.

Charlottesville is to the American east coast what Berkeley is to the west: a bastion of liberalism and political correctness, supportive of the kind of social change that the alt-right despises. Just off camera in the national newsfeeds was a banner hung from the public  library at the entrance of Emancipation Park, reading: “Proud of diversity”.

I heard more snippets of information as events unfolded. The counter-protesters began the day by drawing on the strength of the black church. A 6am prayer meeting at our local church, First Baptist on Main (the only church in Charlottesville where all races worshipped together before the Civil War), set the tone for the non-violent opposition.

The preacher told the congregation: “We can’t hate these brothers. They have a twisted ideology and they are deeply mistaken in their claim to follow Christ, but they are still our brothers.” Then he introduced the hymns. “The resistance of black people to oppression has only been kept alive through music.”

The congregation exited on to Main Street, opposite my old butcher JM Stock Provisions, and walked down to the statue of Meriwether Lewis and William Clark – the early 19th-century Bear Grylls types who explored the west. They went past Feast! – the delicacy market where we used to spend our Saturday mornings – and on to the dreamy downtown mall where my wife and I strolled on summer evenings and ate southern-fried chicken at the Whiskey Jar.

The permit for the “protest” was noon to 5pm but violence erupted earlier. Between 10.30am and 12pm, the white supremacists, protected by a paramilitary guard, attacked their opponents. As the skirmishes intensified, police were forced to encircle the clashing groups and created, in effect, a bizarre zone of “acceptable” violence. Until the governor declared a state of emergency, grown men threw bottles of piss at each other.

At noon, the crowd was dispersed and the protesters spilled out into the side streets. This was when the riot climaxed with the horrific death of the 32-year-old Heather Heyer. Throughout Saturday afternoon and evening, the far-right groups marauded the suburbs while residents locked their doors and closed their blinds.

I sat in London late into the night as information and prayer requests trickled through. “There are roughly 1,000 Nazis/KKK/alt-right/southern nationalists still around – in a city of 50,000 residents. If you’re the praying type, keep it up.”

No one in Charlottesville is in any doubt as to how this atrocity became possible. Donald Trump has brought these sects to group consciousness. They have risen above their infighting to articulate a common ground, transcending the bickering that mercifully held them back in the past.

In the immediate aftermath, there is clarity as well as fury. My colleague Charles Mathewes, a theologian and historian, remarked: “I still cannot believe we have to fight Nazis – real, actual, swastika-flag-waving, be-uniformed, gun-toting Nazis, along with armed, explicit racists, white supremacists and KKK members. I mean, was the 20th century simply forgotten?”

There is also a sense of foreboding, because the overwhelming feeling with which the enemy left was not triumph but bitterness. Their permit had been to protest from noon to 5pm. They terrorised a town with their chants of “Blood and soil!” but their free speech was apparently not heard. Their safe space, they claim, was not protected.

The next day, the organiser of the march, Jason Kessler, held a press conference to air his grievances. The fear is that the indignant white supremacists will be back in greater force to press their rights.

If that happens, there is one certainty. At one point during the dawn service at First Baptist, a black woman took the stand. “Our people have been oppressed for 400 years,” she said. “What we have learned is that the only weapon which wins the war is love.”

This article first appeared in the 17 August 2017 issue of the New Statesman, Trump goes nuclear