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Unwind QE to counter rising inflation

14 Feb 2017

stacks of pound coins

Responding to the latest inflation figures, which show the Consumer Prices Index rose to 1.8% in January, Michael Martins, Economist at the Institute of Directors, said:

“Inflation maintains its rise as the devaluation of sterling continues to make imports more expensive, although January clothing sales helped to offset a steep rise in transport costs. The main imported items affected by sterling’s fall, petrol and food, are fixed costs for many, so a persistent increase will eat into disposable income and put downward pressure on consumption. Luckily, continued strong wage growth will likely offset upward price pressures, at least in the near term. 28% of IoD members intend to increase employment this year, only slightly lower than a year ago, a helpful proxy for pay growth.

“Although the Bank of England has said that they are comfortable with overshooting their 2% target in the near term, a reduction in quantitative easing would help to offset inflationary pressures by reducing the money supply. This would allow private investors back into the short-term gilt market, helping to correct a fairly distortive policy intervention, and freeing up the ability to intervene in the future if necessary. A gradual disinflation of asset prices, particularly housing, would help to reduce another fixed cost, effectively boosting real wages for many. A reduction in QE would also have immediate effect, avoiding the lagged effects of raising interest rates.”   

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