Brendan O’Neill had a good sneer at the Occupy Wall Street protestors in his blog for The Daily Telegraph this week. O’Neill notes that any protest movement that has garnered the sympathies of the US government, a supportive editorial in the Financial Times, and a fashion spread in The New York Times, probably isn’t that radical.
O’Neill is no doubt indulging in a bit of ‘it weren’t like that in my day’ nostalgia. But if he wants to see a ‘proper’ campaign movement, he should look to another finance-related group: ‘Save our Savers’. Judging by the middle-aged outfits and neat placards at their protest outside the Bank of England this month, they won’t be troubling the fashion pages any time soon. And they certainly won’t get any support from your average mainstream economist – because their demands are truly radical: they want to see the Bank doing something to tackle inflation.
Yet this shouldn’t be a radical demand at all. It’s the Bank’s job to keep inflation at, or around, 2%. You can fiddle with the time horizon involved, but it’s been above that target for nearly two years now. So you’d think the fact that consumer price inflation (CPI) hit 5.2% last month, and that retail prices inflation (RPI) is now at a 20-year high of 5.6%, should have the Bank showing at least some sign of concern. After all, the last time RPI was at that level, interest rates were at 11.5%.
Instead, the Bank argues that inflation is set to retreat and that the crisis in the eurozone justifies not only keeping rates at 0.5%, but also printing yet more money. Most forecasters agree. The VAT rise will drop out of the CPI come January and commodity price rises will slow too. But we’ve seen this before. As recently as May 2010, the Bank’s worst-case prediction for the current level of CPI was 4% and its base-case scenario was 1.5%. So it has no credibility. Even if inflation slows, relief will be short-lived. Simon Ward of Henderson, who has consistently and correctly decried monetary policy as too loose, expects CPI to trough “well above 2%” and start rising again in late 2012.
Why does this matter? Everyone ‘knows’ interest rates will stay low, regardless of inflation. The economy is too fragile. Indeed, the experts at our property Roundtable this week all agree that the bank rate of 0.5% is the one thing keeping house prices in suspended animation. But when everyone agrees, it’s time to worry. The ‘Save our Savers’ protests might be restricted to a well-behaved minority for now. But what’s the tipping point? 7%? 8%? The Bank might ignore wider public outrage, but politicians won’t. And when rates finally start to rise, they’ll be playing catch up, so they could move a lot faster than we’re used to. If you’ve got a big mortgage, I’d be very tempted to fix it now.