INFLATION did fall in June but once again it was a case of too little, too late. Consumer price inflation (CPI)?dipped to 3.2 per cent, reflecting a slowdown in fuel costs; yet that remains higher than the Bank of England’s 2 per cent target (and 1-3 per cent band). The retail price index, the older, broader gauge of inflation which includes some housing components, fell to 5 per cent, a number which remains extraordinarily elevated. Someone who has £10,000 in cash is losing £500 in purchasing power every year, a huge hidden tax.
As Simon Ward of Henderson points out, CPI inflation averaged 3.44 per cent in the second quarter versus the Bank of England’s 3.30 per cent estimate. This is the fifth quarter out of the last six that the Bank has underestimated current period inflation.
The Bank will have to hike its forecasts – currently 2.54 per cent and 2.28 per cent inflation for the third and fourth quarters – in its August Inflation Report. Perhaps most embarrassingly of all, the second quarter 2010 outturn of 3.44 per cent compares with a central projection of 0.73 per cent for that very quarter in the May 2009 Inflation Report. But there is some better news: the Bank’s annual report stated that its budget contains an allowance for expenditure of £2.4m on a “new forecasting model”; let us hope this helps improve things.
BRUSSELS IN CONTROL
IT now seems as if at least one of the main pan-European financial regulators being dreamt up by the EU will be based in London, rather than Frankfurt, as previously mooted by the European Parliament. This development – see page 1 – is being heralded by the coalition as a major victory in Europe. How naïve.
The location of these regulators is not what matters; rather, the issue is the powers they have, the policies they pursue and whether they override the Bank of England and other national regulators. On all these fronts, the outlook for London’s competitiveness is likely to be negative, a great tragedy that the coalition appears either unaware or unwilling to confront.
Everybody around the world knows full well that banking needs to be reformed; in truth, it has become deeply boring to repeat this ad infinitum in print, especially given that many reforms have already taken place. We are beyond all of this; the argument now is between those who see reforms as a way of shrinking and endlessly punishing finance and those who want to make the system work sustainably to create jobs and wealth. The tragedy is that the EU, in the main, is in the first camp; the coalition sees itself as much closer to the second camp but in practice still feels the need to inflame anti-banking sentiment, to pass destructive anti-City laws such as the banking levy and to refuse to take on the EU properly.
Given how desperate it is for private sector economic growth, and inward investment into
London’s financial and business services industries, it is time for the Treasury to rethink its rhetoric and tactics. It must stop bashing the bankers and give the industry a chance to reinvent itself. The government should be investing all of its energies trying to make the UK open to business once more. Cutting corporation tax and reducing the deficit is good but insufficient; the world’s investors and entrepreneurs need to be shown that Britain is serious once again about nurturing a private sector expansion.