Last month I wrote an article called "Does Inflation Matter Anymore?", where I argued that despite the common view that Bank of England independence has majestically reigned in inflation to the point that it's no longer of concern, the macroeconomic situation in the UK isn't healthy. There's a near consensus that Gordon Brown has been our greatest post-war Chancellor, and that making the Central Bank independent was his smartest move. In response to my article "How to Wake up the Dinasaurs" Andrew asked "Is that a sign of how slowly it takes economic policy to take effect", and I suggest that we refrain from judging a Chancellor until at least 5 years after they've left office. That consensus view of this chancellor won't last.
If Brown was smart, he'd have exited the building so that the unravelling would be blamed on the next in line - take the plaudits and run. Since he's only moving next door though, he'll have to deal with the problems of his own making. And these are of his making: it was Brown who ordered the Bank to target CPI not RPI; it was Brown who launched a massive increase in public spending that took advantage of productivity gains from China (when the price of so many consumer goods are falling, 2% CPI should be worrying); and cheap credit (from Japan). It was always going to be unsustainable, but the error was watching the wrong target. The Consumer Price Index is not inflation.
And these aren't just the ramblings of an Austrian economist - this is fastly becoming mainstream opinion. A recent Newsnight looked into the shaky foundations of Brown's stewardship of the economy (I can't find a link), and in The Telegraph, Ambrose Evans-Pritchard explains economist's fears,
The Consumer Price Index (CPI) has reached 3.1pc on the back of rising energy and food costs, the highest level since the Bank of England gained operational independence a decade ago.
There's a real debate about what the effect of this situation is, and it's undecided whether or not there's a dangerous house price bubble. I don't think there's any way to objectively know when a bubble exists. However we can use a broad measure of the money supply to determine the amount of credit in the economy, and whether there's too much. M4 - the broadest measure of the money supply - is running at 12% and therefore there is too much liquidity about. Given that, it seems sensible to assume that the housing market is frothing (rather than it's operating beautifully and the excess credit is manifesting itself in a hitherto unspotted part of the economy). We can't know for sure, but it seems a sensible working hypothesis.
When interest rates rise - as they surely must - house prices will cease surging, but it's up to the next Chancellor how this process is managed. The economy is an airbed: Brown merely squeezed on the Dot Com bubble to shift the air pocket to house prices. At some point the charade has to end and the valve released. We've been living beyond our means, and the crunch is coming. When that happens, remember who's to blame.