Here’s a not-too-controversial prediction. Later this month, Big Merv King will get the Basildon Bond out and pen his missive to the Chancellor, Alistair Darling, explaining why inflation has gone over 3.0%.

Here’s what he might write:

Dear Alistair

Hiya! It’s me! Mervyn King, Governor of the Bank of England. As you know, it’s our job to keep inflation stable – at around 2.0% as measured by the Consumer Price Index. If it goes below 1.0% or above 3.0%, I have to write you a letter explaining why.

Guess what! It’s gone above 3.0%. So this is that letter. Here goes…

There’s no easy way to say this, but I reckon it’s all your boss’s fault. As Chancellor, he presided over a massive credit binge, which is inflationary. He also allowed public spending to grow ahead of inflation. That’s inflationary too.

When we had steady growth and stable prices, he was happy to stand up and take a cheeky bow. Now we have slowing growth and rising prices. Personally I reckon you, or your boss, should be writing a letter to me, not the other way round.

But anyway, there’s your answer. We missed our target because your boss is a clown.

Cheers

Merv

PS I’ll be invoicing the Treasury for the cost of this stamp. I’m not made of money, you know!

On second thoughts, he probably won’t write that. But I bet he wants to! So… why am I certain that the Bank will miss its target? Because yesterday the results of its quarterly Inflation Attitude Survey came out.

The average Briton reckons the true inflation figure right now is 4.9%. And they reckon it’ll average 4.3% for this year. Compare these figures to February. The average respondent then thought inflation was running at 3.9% per year, and would average 3.3% in 2008.

This is a massive jump. It tells us that the Bank of England is losing the battle when it comes to influencing inflation expectations. And these expectations matter.

Inflation has a tendency to be what economists call positively autocorrelated. What this means is that high inflation in one time period tends to be followed by high inflation in a second, subsequent time period (we would call it negative autocorrelation if the opposite were true, i.e. we saw a high-low-high-low pattern).

Here’s how this works. Once inflation starts to rise, consumers notice. How can we not – we all have to buy things. And – with the exception of the terminally unobservant – we notice when the prices of things we buy go up.

And when there’s an expectation that prices will rise, there’s a very great likelihood that they will rise. The main mechanism that drives this process is wage demands. Faced with a rising cost of living, people ask their employers for more money. If employers refuse, they’re left with an unhappy and truculent workforce. Not good for businesses.

But if employers concede, their profit margins are squeezed. In order to maintain profits, they pass the cost of their increased wage bill onto the consumer, in the form of higher prices. Voilà! We have inflation.

Then, the whole dance begins again. This is the classic wage-price spiral. It is through this mechanism that higher inflation tends to beget higher inflation. We’re seeing it right now – prices rising, and consumers factoring that into their expectations.

So what can the Bank do? Simple – slam the brakes on! Confound those expectations!

The bond market has priced in three rate rises over the rest of the year. Why not just do them all at once? Send a clear message that the Bank means business. We’ll see an immediate inflow of funds into sterling, and a stronger pound will make imported commodities like food and oil less expensive for us.

Of course, a steep rate rise will play havoc with the housing market. But last I looked, that was on the critical list anyway.

However you look at it, the economy’s in a bind. We’ve had some good years. Now we’re going to have some bad. Boom and bust never went away, whatever New Labour might have told us to the contrary.

Either we raise rates, and people (especially those with loans to repay, such a mortgages) feel poorer. Or we allow inflation to keep creeping up. Faced with ever rising prices, people will feel poorer.

Some of those who feel poorer will, depending on their line of work, ask for a pay rise. Of those, a significant number will be knocked back, or offered something they deem unsatisfactory. Today sees the start of the Shell tanker drivers’ strike – a four-day bid to secure a 12.5% pay rise.

But this won’t be the last strike we see this year. Things will get really interesting when public sector unions decide to take on Brown’s weak government…

Get ready for some dramas.

How a €20 bribe unlocked Central Africa’s long-lost treasures

‘Let me tell you a story,’ writes Manraaj Singh in today’s Profit Hunter. ‘It’s about how one simple €20 investment could end-up paying back billions…

‘It didn’t happen on Wall Street or in the City…instead, it happened in a Belgian museum…’

As any mining start-up will tell you, exploration is a dicey business. It’s a safe bet that Central Africa has vast mineral wealth – but where, exactly?

Ordinarily it would take years of searching in malaria-infested jungles. But the Chinese have done something very clever. You see, there’s a museum in Belgium which houses maps dating back to the days of the Belgian Congo. One of things these maps show is – you’ve guessed it – the best place to mine for various minerals.

When a group of Chinese ‘tourists’ showed up at the museum, staff could be forgiven for thinking they were just another group of harmless holidaymakers.

But the souvenirs these guys wanted weren’t to be found in the museum gift shop…

Manraaj Singh has the full story in today’s FREE edition of Profit Hunter. Find out more HERE

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