Inflation Ranpant In The UK

David Stevenson notes that inflation is already rolling upwards in the U.K.: the new-style CPI is up 3.7%, while the old-style Retail Priice Index is up 5.3% (5.4% ex-mortgage payments.) He makes fun of Bank of England governor Mervyn King for dismissing its significance, but King's words bear noting to see if his narrative gets exported across the pond:

Looking to the future, says King, all the spare capacity in the economy – unused resources that could be cranked into action if demand picks up – will bring CPI down again. So there are no interest-rate rises on the agenda....

"The pace and the extent of the prospective fall in inflation are highly uncertain", it says. Inflation should fall back to target within a year only if there are no "further price level surprises". Indeed, "there's a risk inflation may be raised by further commodity price increases or other price level surprises"....

Prices have already risen much higher than Mr King was forecasting. If people start to get back into an inflationary mindset, cost of living increases could really get out of hand. What's more - as we've pointed out before - inflation is the friend of the debtor, who can repay his loans out of devalued cash. And there's no bigger borrower in Britain than the government. So a bit more inflation would, arguably, be quite handy for it.

There's already a call amongst certain monetary outposts for a higher inflation rate, most notably from the head of research of the San Francisco branch of the Fed. The soon-to-be former head of that branch, Janet Yellen, is going to become deputy Chair of the Fed's Board of Governors.

I have a sneaky suspicion that one of the main reasons for the extended period of the near-zero Fed funds rate, along with the bulk of the QE firepower being directed at the MBS market, is because the Fed is trying to hold off the coming option ARM reset bulge that's slated to peak next year. If I'm right, then the Fed's hands are effectively tied. Should inflation ramp up in the U.S., we'll likely hear Ben Bernanke saying much the same thing as Mervyn King is now.

Or, for that matter, Janet Yellen, or both. Certainly, U.S. Treasury officials have an interest in talking down inflation expectations because they want borrowing rates to be as low as possible. For reasons of their own, the bulk of the Fed governors may share that desire.