In the past, I’ve often written about the stupidity of inflation targets.
Central banks, all around the world have adopted an inane policy to have inflation targets, that is to say, they believe there is a certain inflation rate which is ideal, and they work towards gaining that rate, so as to work towards an “ideal economy”. Most deem an annual inflation rate of 2% as “ideal”. Nice of them, right? They want the money that you earned and saved today, to erode in value at 2%, annually. That way, if you start earning and saving, on your own, say, at the age of 20, the money will be nearly worthless by the time you feel want to retire.
It’s utter imbecility ….. if our central banks were actually functioning for the people. As it turns out, they’re actually working against the people of their respective nations.
First and foremost, inflation is a symptom of economic conditions, it is not a cause. An annual inflation rate, on it’s own, is meaningless. One can easily achieve the desired inflation rate by adjusting money supply, independent upon economic conditions, which is what most of the central banks have done, through various measures.
So, what happens when a nation is about to achieve their idealized inflationary rate?
This causes me to stutter because I can’t find the words …….. Let’s read on.
LONDON (AP) — The British pound spiked near a six-year high against the dollar Tuesday after a surprisingly big increase in U.K. inflation fueled expectations that the Bank of England may start raising interest rates soon, possibly by the end of the year.
Figures Tuesday from the Office for National Statistics showed consumer prices rose by an annual rate of 1.9 percent in June, just below the Bank’s ostensible target of 2 percent. Inflation, which rose from May’s 4 1/2-year low of 1.5 percent, is now at its highest level since January.
The consensus in the markets was for a far more modest increase of 1.6 percent rise. The forecast-busting figures gave the British pound a further boost to $1.7192 at one stage, its highest level since October 2008 when the global financial crisis was in full swing. It then settled back to trade 0.4 percent higher on the day at $1.7151.
With the U.K. economy growing faster than most other developed economies, the pressure is mounting on the Bank of England to start increasing interest rates, especially if inflationary pressures are starting to build. The bank’s main rate has been at an all-time low of 0.5 percent since March 2009.
“The news will further fuel expectations that the Bank of England will start raising interest rates sooner rather than later, with November looking the most likely month for the first hike,” said Chris Williamson, chief economist at Markit.
Okay. I’ll try to work backwards on this so some of the people with less experience with this madness will understand.
When a central bank raises interest rates, they do so to slow down an economy, mostly to combat “high” inflation rates. That is to say, they don’t want the economy to overheat.
Yeh, they’re just burning it up in the UK!!!!
It is true, they’re doing a bit better than most, but, the 1st quarter was 2.7% and now, 3%. For a nation with the population growth of the UK, that’s on the low side of good, not great. For the US, this would be about “treading water” growth.
But, consider, the UK didn’t even achieve their “inflation rate”, as it is calculated, today. (It’s not near the true inflation rate, but, that’s another topic.) But, they came near it. So, what was the reaction? The Pound rose to a 6 year high ……. meaning that, suddenly, their money was worth more, (deflationary), because of the fears that the UK would raise interest rates ….. which is further deflationary.
When I write “deflationary”, it means that both, the rise of the value of currency, and the rise of interest rates cause an economy to slow down to a lower GDP than it would otherwise have if these things hadn’t happened.
What the inflation targets are doing is putting each and every economy with such inflation targets in a no-win situation. You can’t win, you can’t grow.
And, what happens to things which can’t grow?