Hysteresis

Our economic policy makers are clearly suffering from a form of psychological hysteresis. This wonderful word, hysteresis, re-emerged after the early Geoffery Howe budgets had send the economy into a nose-spin, during which a third of our manufacturing industry was wiped out.

Somebody clever thought up using the word hysteresis to describe a market economy where its decline has been so severe that any normal propensity to rebuild for recovery became paralysed. In such circumstances only a great stimulus from outside could help revive the market economy.

The same seems to have happened to the brains of your financial and political leaders. For six months now they have been chuntering on about the dangers of deflation. In Michael Hestletine’s famous phrase, “it is all balls.”

As I keep commenting here, inflation is an ever-present threat, particularly in the medium term (i.e. before, in Lord Keynes’ view, we are all dead.)

The Bank of England managed to stir up a cohort of commentators to build up over the weekend and on Monday that the latest inflation figures would show a further dramatic drop, heralding a great fear of deflation.

So what happened? The figures were published yesterday evening, and practically the whole of the press reported that we were heading for deflation.

The only financial journalist, that I have read, whose brain is not suffering from hysteresis, is Norma Cohen in the Financial Times. She writes inflation is more entrenched than many economists had imagined.

Despite all the projections, the Consumer Price Index rose in January at a year-on-year rate of 3%, a mighty reduction of 0.1% over the December figures.

But, as Norma reports, retail prices – which more accurately measure household prices – deny economists’ expectations of a contraction and registered an 0.1% year-on-year rise in January.

The Financial Times gives a wonderful spread on the main parts of our budget – bread and cereals up almost 10% in the last year, dairy products by 8.5%, coffee and beverages by over 16%, alcohol by nearly 6%, electricity and other household fuels by a cool 36%+

It is one thing to have the residents in the mad house sounding off with their latest delusions. It is desperately worrying when those residents are actually running the economy.

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