Worrying signs on inflation


Economics Correspondent

Kenneth Clarke, the Chancellor, is a man of irrepressibly optimistic views about the economy. He loses no opportunity to say that the outlook for growth is favourable and inflation is the lowest for a generation.

These rosy prospects have not stopped him reducing interest rates on the grounds that the economy has weakened significantly. However, buoyant monetary conditions mean these rate cuts could prove an inflationary time- bomb for the Chancellor.

Mr Clarke held fire after yesterday's monthly meeting, rather than risk another clash with Eddie George, the Governor of the Bank of England. A third reduction in the cost of borrowing in as many months would have come as a surprise after minutes of the December meeting indicated that Mr George disagreed with the quarter-point cut in January. The Governor was concerned about the behaviour of the broad money measure, M4.

Mr George has been criticised for worrying too much about money growth when the economy has weakened so much. But at the monthly meetings between Bank and Treasury officials a decade ago, the predecessor of today's high- profile summits between the Chancellor and Governor, monetary indicators were at the top of the list of factors influencing interest rate decisions. These included growth in broad and narrow money, the exchange rate, share prices and house prices adjusted for inflation, and land values.

Few City scribblers pay attention to these monetary indicators now but many of them are flashing a warning against interest rate cuts. Tim Congdon of Lombard Street Research, a monetarist member of the Treasury's independent panel of forecasters, said: "We are not as far down the inflationary route as we were 10 years ago, but the similarities are certainly there."

Steven Bell, director of research at Deutsche Morgan Grenfell, said: "Even if you are not a monetarist, you have to ask now which risk would we rather take. Monetary policy too tight, taking a risk with growth when we know there are tax cuts and consumer windfalls this year? Or monetary policy too loose, taking a risk with inflation?"

The key worry is the broad money supply expanding at nearly 10 per cent, while cash in circulation is rising at a steady rate close to 6 per cent. Faster economic growth would soak up some of this money, but it could also trigger higher inflation.

Asset prices have already risen sharply. Shares have climbed 23 per cent during the past 12 months and are at their highest, after inflation, since 1973. The price of gold is near a 10-year high.

Even house prices, adjusted for inflation, remain higher than they were a decade ago and the Halifax price index has climbed for five months running.

Start your day with The Independent, sign up for daily news emails
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Recruitment Genius: Online Customer Service Administrator

£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

Recruitment Genius: Digital Marketing Executive

£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

Day In a Page

'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

Everyone is talking about The Trews

Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living
Increasing numbers of homeless people in America keep their mobile phones on the streets

Homeless people keep mobile phones

A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before
'Queer saint' Peter Watson left his mark on British culture by bankrolling artworld giants

'Queer saint' who bankrolled artworld giants

British culture owes a huge debt to Peter Watson, says Michael Prodger
Pushkin Prizes: Unusual exchange programme aims to bring countries together through culture

Pushkin Prizes brings countries together

Ten Scottish schoolchildren and their Russian peers attended a creative writing workshop in the Highlands this week
14 best kids' hoodies

14 best kids' hoodies

Don't get caught out by that wind on the beach. Zip them up in a lightweight top to see them through summer to autumn
Robert Fisk in Abu Dhabi: The acceptable face of the Emirates

The acceptable face of the Emirates

Has Abu Dhabi found a way to blend petrodollars with principles, asks Robert Fisk