by Damon de Laszlo, ERC Chairman
The following is an extract from the Chairman’s Daberiam Report.
Excuses by Central Banks abound, but it’s beginning to dawn on everyone that inflation is here and serious. The Bank of England has yet again to explain that it was caused by exceptional circumstances. The models have long ceased to work and have been disconnected from the real world for probably ten years. The steady and low inflation rates that Mr Brown was so proud of in the mid noughties were to a large extent due to our ability to import Asian consumer goods. The Bank of England models basically ignored this and after the recession have been used to justify forecast low inflation on the basis that there is unemployment and industrial capacity so prices cannot go up! Here again the reality has been ignored. Asian prices are rising rapidly and are brought on by rising food prices and wages. Spare modern manufacturing capacity in the UK is very limited and, as anyone in the manufacturing sector knows, there is a tremendous shortage of skilled labour.
Everyone who goes shopping knows that prices for virtually everything have been rising inexorably for the last two years or more, and it is now beginning to be the focus of attention in the Press. Whether the Bank of England or European Central Bank can do anything about it is another matter, but at least they look as though they are no longer in total denial.
The Return of Optimism
Britain is in a strange state, almost suspended animation. The Government is doing the right thing in hacking into the debt mountain and trying hard to deal with the legacy of what amounts to a corrupt financial administration. The difficulty facing Cameron and Osborne has been made more problematic by their coalition partners. Added to this, having to impose such draconian cuts inevitably results in upsetting many vested interests who have lived off the largesse of the government; also it is inevitable that mistakes of detail will be made or created by those opposed to the cuts for political or self-interested reasons. Libraries and woodlands come to mind, really very minor savings but hugely emotional subjects around which “Middle England” can rally. The Prime Minister’s and the Chancellor’s courage will be tested and it can only be hoped that the economy starts to recover in a general fashion in good time for the next election. One of the good and interesting by-products of all this change is that the large and impressive cadre of new MPs are learning about the sand in the works and the frustration caused by the bureaucracy. Hopefully, this will encourage Members of Parliament to be less inclined to legislate on the hoof and think harder about the consequences of the proliferation of often conflicting laws that they load on the private sector!
All in all, the right things seem to be happening and growth and economic recovery is well on the way. While the pain of paying for the past failures of financial regulation and profligate government expenditure has to be borne, at least the indicators have switched to the right direction and we should see a returning level of optimism.