At best, less worse

As expected, the Bank of England kept its key rate unchanged at 0.5% today, and also left the size of its quantitative easing (QE) programme at £325 billion. With inflation finally heading down toward the Bank's 2% target,  there is no reason to expect interest rates to change for a long time to come. However, with growth prospects still looking shaky -- the Bank is expecting a zig-zag pattern this year, as one-time influences such as the Queen's jubilee and the Olympics play themselves out -- there is still the possibility of a further increase in the QE programme in the coming months.

The interplay between inflation and growth trends is an interesting one, and regularly generates some ill-thought-out comments in the media.  I have regularly castigated the Bank for its seemingly cavalier attitude towards above-target inflation in recent years, a view that is, of course, entirely unrelated to the fact that I am on a  fixed income. However, there seems to be a view in the media that as inflation comes down, the damage caused by past price increases will somehow be unwound.  Take this quote, for example, from the BBC website's coverage of today's rate decision:

"Lowering inflation is seen as key to the recovery as it will help alleviate the squeeze on consumers and lead to a rise in spending." 

Really? Surely reducing inflation will do no more than stop the squeeze on living standards from getting any worse. The real purchasing power that has been eaten away by inflation in the last three or four years will not be recouped unless and until earnings start to rise faster than inflation. My own quick calculation suggests that CPI inflation outpaced growth in average earnings by a cumulative total of just under 7 percent between the end of 2007 and the end of 2011. That's a nasty bite, and one that would take a long time to repair even under much more favourable circumstances than we currently face.  

To be fair to the Bank of England, its own position on this key issue is a lot more nuanced than that of the media.  This is from the Bank's February Inflation Report:  "Domestically, the strength of the recovery will depend on whether household spending has further to adjust to past falls in real incomes and the more uncertain economic outlook."  Exactly so; and with unemployment slowly but steadily rising, the psychologically important price of fuel at an all-time high, and the Government poised to take more money from the "squeezed middle" when the new tax year starts tomorrow,  it's hard to get too optimistic about prospects for household spending, even if overall CPI does continue to head toward the Valhalla of the 2% target.

This "recovery" is coming to remind me more and more of the 1990s in Canada, when the government there finally and successfully got to grips with its fiscal situation.  The data for the decade now show that the Canadian economy eked out slow but steady expansion, but it would be hard to find many Canadians who would say that they felt any better off.  It was in many respects a lost decade.  I suspect that this current period in the UK will look rather similar when we come to look back on it ten or twenty years hence. Words cannot express how happy I am to be able to live through this kind of thing twice.