As usual, the economic statistics of every country in the Western world paint a much more pessimistic picture than do those of the United States. These are not good days for Ben Bernanke’s credibility.
The number of “stagflation” hits so far this year is 719. In the past six weeks the word has been used more than in all of 2003. At the current rate, my target for the year-end is about 6,000, a 200pc rise in a year. The dragon is stirring.
If you’re worried about inflation, then this is shaping up to be a scary week. Today’s consumer price index (CPI) reading is expected to rise from December’s 2.1pc to at least 2.4pc. Next up, expect tomorrow’s Bank of England inflation report to warn that CPI will this year very likely reach the 3.1pc “letter-writing” level at which the Governor has to explain to the Chancellor what’s gone wrong.
Nothing in the rest of the week is likely to be as unsettling as yesterday’s producer prices data, which showed a spectacular increase in manufacturing inflation.
Input prices at Britain’s factories rose 2.6pc month on month in January, taking the annual rate to 18.9pc. If you had to read that number twice, so did I. We haven’t seen these kinds of inflation numbers since the dark days of lava lamps and bell-bottoms.
The obvious culprits – food and energy prices – played their part, but even stripping out these volatile elements, prices rose at their second fastest in 10 years. At the factory gate, even after manufacturers took a hit to their profit margin, the year-on-year rise in output prices was 5.7pc, way above consensus and the worst reading since 1991. A seasonally adjusted number is the worst since 1985.
Yesterday’s report from the Office for National Statistics provided something else to worry about too. Import prices, which for more than a decade have disguised the soaring cost of home-grown services, are also on the move. For years the Bank of England winked at rising service sector prices because, with the cost of goods from China tumbling, domestic inflation was needed to prevent a slide into deflation. That fig leaf has now fallen.
This is why we’ve been unable to believe headline inflation figures. Things we buy infrequently like televisions may have got cheaper, but regular payments to hairdressers, schools and utilities have been rising for years.
Globalisation, which initially pushed prices lower, has swung into reverse. Soaring demand in the emerging world fuels higher food and energy costs, which feed into higher wages in places such as China (inflation is at a 10-year high) and so into higher import prices here. Countries at the sharp end of the Asian boom, such as Australia, say prices are spinning out of control.
A little bit of inflation is a good thing, because it acts as a tax on idle money. It persuades people not to leave their cash under the mattress or in low-interest accounts, but to put it to productive work.
Central banks like to maintain steady but low inflation because the alternatives are horrendous. In a deflationary environment, idle money is profitable, there’s no reward for risk and you end up like Japan, in an endless lethargic slump. But high inflation is equally damaging because it diverts money out of economically “good” investments into inflation-proof safe havens such as gold, collectibles and (sometimes) property.
The worst of all possible worlds is when inflation rears its ugly head even as growth slows. Stagflation holds a special place in the dark corners of economists’ minds because it renders a central banker’s monetary armoury powerless to fight a uniquely debilitating condition. He can’t stimulate growth with lower interest rates because prices will take off and he can’t bash inflation with higher rates because it will tip the economy into recession.
In America, Ben Bernanke has thrown caution to the wind, slashing interest rates by 2.25 percentage points. He is gambling that he can avert recession this year and then turn his attention to rising prices. But history suggests that, as with toothpaste, it is easier to let inflation out of the tube than to squeeze it back in again.
Inflation is fiendishly difficult to control and, like an oil tanker, slow to turn around. Yesterday’s jump in producer prices followed a surge in the past year in a range of inflation expectation measures. There is a real danger these latest data are not just blips but a return to a lasting pick-up in price growth.