July 25, 2007 | posted by Michael Baxter in IABN |

Of late it has been tempting to say that the economic cycle is dead. 60 months of economic growth and still going strong#33; Maybe, here in Blighty, we have licked the economic cycle altogether.

Well, impressive as 60 months of growth may seem, these days the UK is like a soft flower floating on the high winds. We have done well to achieve stability while all around recession follows boom like night follows day, but there are underlying forces at work here, and not even the UK is immune.

Of late, much has been made of inflation. There’s good reason too. The last few years have seen an inexorable rise in credit. Of late the money supply both in the UK and US has been rising fast too.

In any other era, inflation would been ignited by now. But today, it’s different. The massive surplus capacity brought to the world economy by a growing India and China, coupled with the Internet bringing almost perfect price knowledge to customers, has acted as a big constraint to price rises.

Even so, over the last few months the inevitable has started to occur and price pressure has been building. It takes time before the cause and effect equation is complete. And now we know that despite India, China and the Internet, the inflation genie is far from dead, although it’s unlikely to be quite as frisky as it used to be.

In a way, it is quite ironic. Central banks have reacted to soaring rise in credit, giving rise to inflation fears, just as markets start fearing lending has been a tad irresponsible. It seems that just as we start to get our heads around the idea of higher interest rates, then signs are afoot that the force of economic gravity is just beginning to come down on those very forces that created the inflation fears.

If, as the article above suggests, the credit bubble is coming to a close, then it will take some time before this translates into lower inflation. In the meantime, the Bank of England and other central banks will be wrestling with the after-effects of the boom.

Yesterday saw two pieces of news break. First of all, one of the Bank of England’s two deputy governors became even more hawkish than normal.

The Bank’s two deputies occupy different ends of the hawk/dove spectrum. Rachel Lomax is considered something of a dove, cynical about the relationship between the rising money supply and inflation. The other, Sir John Gieve, is an ornithologist’s dream, a very rare bird indeed, an arch hawk, or so it would appear.
Yesterday he appeared to call for the Bank of England to stop pussy-footing around with quarter of a per cent rises, and go for the jugular. He said, “If we get behind the curve, gradualism in monetary policy could compound problems.”
Most economists now seem to think that rates will rise to 6 per cent, but only a minority expect further rises. But if we take Sir John literally, it would appear he is advocating at the very minimum one hike very soon, and perhaps he is even suggesting the bank should up rates by half a per cent.
And yet, yesterday, we saw just a hint that maybe inflation is beginning to ebb.
You may recall, the CBI was one of the first to warn of dangers bubbling. Its Industrial Trends Survey has been improving. Every month it asks its members whether orders are up or down on a year ago. The balance forms its index. Last month it reported on a score of plus 8 for the sector, the joint highest score in 12 years.
It’s good that manufacturing appears to be staging something of a comeback, but alas, price pressures are building too.
The CBI also publishes an index for showing what prices manufacturers expect to charge over the following four months. And throughout this year this index has been making the headlines for the wrong reasons.
It hit plus 21 in March, but since then it has been falling. For July the index is down to 11, the lowest level this year.
It will take some time before the kind of trend which has been illustrated by the CBI shows up in the general inflation figures. Even so, there are signs that at last inflation pressures are being brought to heel.
Unfortunately though, the Bank of England has to set its sights on the here and now, which is why the rate of interest is likely to rise, despite the changes in underlying trends.
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