Missing the target

LET’S FACE it, if Mervyn King had any other job he would have been fired yonks ago. A big part of his mandate is to keep inflation at or around the target level of 2 per cent. But he has failed to do so for around three years now – and, as a result, should have been shown the door quite some time back.

Whatever external forces the Bank of England blames for the overshoot, the bottom line is that for all of 2011 it has created more than double the inflation the government has asked it to. By any standards, that’s an epic failure.

Anyway, repeated policy-bungling aside, King’s still here and he’s still the man ostensibly in charge of keeping inflation in the UK under control. Last week, however, while issuing his latest Quarterly Inflation report, we were once again reminded that he is drastically failing to do so.

Firstly, inflation came in at 5 per cent during October, down 0.2% on September, but still way higher than the 2 per cent target. So it was surprising to say the least when, the next day, while presenting the latest Quarterly Inflation report, King said he was very confident that the CPI will fall sharply next year.

Time to relax? Maybe not. In literally the same breath, King said that nobody knows what’s going to happen tomorrow, let alone in the next 12 months – which, it has to be said, undermined his confident claim for inflation next year.

During last week’s press conference, the elephant in the room inflation-wise, of course, was the effect of QE on inflation in the short to medium term. Unbelievably, this wasn’t even mentioned.

Using history as a guide, whenever you print money out of thin air you always devalue the purchasing power of the currency and drive up inflation. Which begs the question: even with the economy so weak, why would King agree to print money with inflation so high?

But maybe King’s real priority isn’t to drive inflation down after all. That could actually be PR to keep the public as a whole happy.

Our view is that the Bank of England has secretly given up on the 2 per cent target and is actively trying to achieve annual inflation of around 5-7 per cent.

In doing so, its goal is to inflate away the UK’s private and public debt by devaluing the pound. After all, if the Bank of England can hold CPI inflation at 7 per cent for 10 years, the value of the UK’s debt will be cut in half.

What puts this argument beyond doubt is the fact that, with the CPI more than double the target, the Bank decided to print another £75bn. However big the economic hole it is in, no rational policymaking entity would do that unless its agenda was to stimulate even more inflation.

Inflation is simply tax by another word, but we are conditioned into thinking of it as an accident or just the way things are, rather than a deliberate tax that we can all see and measure.

We believe high inflation is the unstated but unequivocal strategy of the Bank of England to reduce the UK’s deficit and bring our economy back from the brink. In which case, Mervyn King may not be the policy bungler many people believe him to be.

Thomas Paterson is chief economist at Gold Made Simple