The decision by the Bank of England to raise interest rates by another 0.25 per cent last week came as little surprise, though some of the more sado-monetarist tendency were upset that it wasn't half a per cent. Everyone appeared to agree that not only would the Bank raise rates, but that it was the right and proper thing to do.
But was it? We are told, almost universally, that higher and higher rates are needed to stop the runaway UK consumer, who is apparently borrowing too much, spending too much and causing inflation. And usually as evidence we are pointed to the level of house prices, given some platitudes about first-time buyers and delivered an assertion that the UK consumer is overheating.
Why then don't we seem to be getting any inflation? More correctly, why are we not getting any inflation in the areas that are driven by this consumer with apparently too much money in his pocket?
There's certainly plenty of inflation in areas where the Government sets prices - rail fares, council tax, regulated utilities - but on the high street prices are falling.
Is there then a risk that we are applying a cure to a disease that doesn't exist? And more worrying, will this cure kill the patient?
The real concern I have is that economic orthodoxy is in danger of driving the UK economy into a downturn due to a faulty diagnosis of the patient's condition. Not terminal maybe, but certainly unhealthy. To explain, for all the noise (and nonsense) about the housing market, the main driver in interest rate decisions seems to be a notion of whether the economy can travel at its current speed without triggering inflation, or "overheating". This rate, in turn, tends to be a function of the overall level of employment in the economy. My concern is that unemployment is a lot higher than the statistics suggest and that, far from overheating, the patient is cooling rapidly. Raising rates is making this worse. A lot worse.
UK overheating concerns focus on an unemployment rate of 4.8 per cent (on an international measure), but the reality could be twice this level. An important study from Sheffield Hallam University recently highlighted that there are a staggering 2.1 million workers in the UK defined as long-term sick - up from only 0.6 million in 1981. More importantly, the researchers suggested that around 1.2 million of them would be working if the economy were stronger.
In other words, statistical sleight of hand has produced an apparently overheated unemployment level of 4.8 per cent, when the real number is nearer an extremely tepid 9 per cent. This is close to the rates in the eurozone, where the ECB rightly holds short-term rates at 2 per cent.
That's the dilemma then. UK rates are being set on the basis of a framework that suggests we are growing too fast - supported by an unemployment rate that vastly understates the real level of the available workforce. In the meantime, falling interest rates acted as a tax cut for households as well as encouraging them to take on more debt. Putting rates back up will provide more of a slowdown since the debt level is now almost twice what it was in 2001 and the Government's tax take is also rising.
Borrowing too much, spending too much and causing inflation? That's not the British consumer, it's the British Government. And the cure for that is not to make the rest of us pay more for our mortgages.
Mark Tinker is a director of Execution Stockbrokers. Mark. Tinker@executionlimited.com