Two-Digit Inflation: the Bank of England Forecasts It, But the ECB Refuses to

With consumer price inflation (CPI) reaching the worrisome level of nearly 9% in the Eurozone, one should look at Producer Price Inflation (PPI) to see what the coming months hold in store. Indeed, as producers grapple with increased production costs, it takes some time before they pass them on to consumers. Initially, they try to cut corners wherever possible to avoid losing customers. But eventually, if the PPI keeps rising, the full costs will be factored into consumer prices, and producers who cannot do so, will simply close shop.

Looking at monthly inflation figures over the last 12 months, both for CPI and PPI, one could project what the CPI will be in December 2022, if such developments were merely linear projections. Thus, based on CPI and PPI rates for the Eurozone of 4.9% and 21.9% respectively in December 2021, and of 8.6% and 35.8% in July 2022, CPI inflation might well shoot over 14% by December 2022. This does not consider non-linear dynamics, for instance, another major hike in energy prices as a result of the suicidal EU energy policy, a new round of QE in September, or a systemic collapse.

The Bank of England has projected similar figures for inflation, exercising more candor than certain other central banks. On Aug. 4, the BoE forecast a 13.3% official rate of annual inflation in the U.K. within two months, and continuing right through 2023 at that level or near it; as well as a serious recession, lasting from October 2022 until at least the end of 2023. Wishing, perhaps, to make sure of that last part, the bank hiked its discount rate by 0.5% for the first time in three decades, to reach 1.75%. The bank’s Monetary Policy Committee blamed all of this, of course, on Russia, asserting, “There is a risk that a longer period of externally generated price inflation will lead to more enduring domestic price and wage pressures.”

Official U.K. inflation as of June was at 9.4%, not that much higher than the European average rate of 8.9%. Illustrating that the European Central Bank (ECB) could have made the same forecast, had it dared, the Swiss website In$ide Paradeplatz (Aug. 5) calls the ECB “powerless” in front out-of-control inflation. In order to curb it, according to the website, the ECB would have to raise rates to 1% or 2% above the inflation rate (now at 8.9%)! But, “An ECB interest rate of 10% — that would be the end of the financial system. Real estate, stocks, bonds: everything would implode. And hardly a single one of the 19 Eurozone member states would not be crushed by debt service and go bankrupt. That’s why the interest rate hikes didn’t come at first, and now in homeopathic doses. And the ECB — like many other central banks — is hoping for a miracle.”