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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Donald Trump is the Republican nominee. What now?

So a Clinton-Trump general election is assured – a historically unpopular match-up based on their current favourability ratings.

That’s it. Ted Cruz bowed out of the Republican presidential race last night, effectively handing the nomination to Donald Trump. “From the beginning I’ve said that I would continue on as long as there was a viable path to victory,” Cruz said. “Tonight, I’m sorry to say it appears that path has been foreclosed.”

What foreclosed his path was his sizeable loss to Trump in Indiana. Cruz had bet it all on the Hoosier State, hoping to repeat his previous Midwest victories in Iowa and Wisconsin. He formed a pact with John Kasich, whereby Kasich left the anti-Trump field clear for Cruz in Indiana in return for Cruz not campaigning in Oregon and New Mexico. He announced Carly Fiorina as his vice-presidential nominee last week, hoping the news would give him a late boost.

It didn’t work. Donald Trump won Indiana handily, with 53% of the vote to Cruz’s 37%. Trump won all of the state’s nine congressional districts, and so collected all 57 of the convention delegates on offer. He now has 1,014 delegates bound to him on the convention’s first ballot, plus 34 unbound delegates who’ve said they’ll vote for him (according to Daniel Nichanian’s count).

That leaves Trump needing just 189 more to hit the 1,237 required for the nomination – a number he was very likely to hit in the remaining contests before Cruz dropped out (it’s just 42% of the 445 available), and that he is now certain to achieve. No need to woo more unbound delegates. No contested convention. No scrambling for votes on the second ballot. 

Though Bernie Sanders narrowly won the Democratic primary in Indiana, he’s still 286 pledged delegates short of Hillary Clinton. He isn’t going to win the 65% of remaining delegates he’d need to catch up. Clinton now needs just 183 more delegates to reach the required 2,383. Like Trump, she is certain to reach that target on 7th June when a number of states vote, including the largest: California.

So a Clinton-Trump general election is assured – a historically unpopular match-up based on their current favourability ratings. But while Clinton is viewed favourably by 42% of voters and unfavourably by 55%, Trump is viewed favourably by just 35% and unfavourably by a whopping 61%. In head-to-head polling (which isn’t particularly predictive this far from election day), Clinton leads with 47% to Trump’s 40%. Betting markets make Clinton the heavy favourite, with a 70% chance of winning the presidency in November.

Still, a few questions that remain as we head into the final primaries and towards the party conventions in July: how many Republican officeholders will reluctantly endorse Trump, how many will actively distance themselves from him, and how many will try to remain silent? Will a conservative run as an independent candidate against Trump in the general election? Can Trump really “do presidential” for the next six months, as he boasted recently, and improve on his deep unpopularity?

And on the Democratic side: will Sanders concede gracefully and offer as full-throated an endorsement of Clinton as she did of Barack Obama eight years ago? It was on 7th June 2008 that she told her supporters: “The way to continue our fight now, to accomplish the goals for which we stand is to take our energy, our passion, our strength, and do all we can to help elect Barack Obama, the next president of the United States.” Will we hear something similar from Sanders next month? 

Jonathan Jones writes for the New Statesman on American politics.