My bet with Andrew Lilico

 

Following today's mildly encouraging inflation figures, Chris Giles observed that a number of economists had predicted that quantitative easing would lead to "hyperinflation", which now seems highly unlikely to materialise.  This provoked a conversation between me, Chris, Giles Wilkes, Pawel Morski, and ECONOMIST HULK, in which Andrew Lilico expressed his view that if we returned to healthy growth, inflation would inevitably follow.   Andrew argued: 

If economy's back to growing faster, inflation will go back to rising. Betcha!

I disagree with  Andrew; I think the UK has plenty of spare capacity, and is quite capable of sustaining a period of growth above the historical trend (about 2%) without a sharp rise in inflation. So we agreed a bet.  Andrew's prediction is that if real GDP growth goes above 2% then inflation (as measured by the CPI) will rise above 5%, within 18 months. So, for example, if GDP in the four quarters to the end of 2013 is more than 2% higher than GDP in the four quarters to the end of 2012, then Andrew's prediction is that the CPI will rise more than 5% at some point before the end of the second quarter of 2015.

The bet is £1000 (in 2012 pounds - after all if Andrew wins then 2015 pounds will be worth much less!).  Watch this space..

Comments

Kit Juckes 's picture

The chances of your losing the bet are very remote. Wage growth is still slowing because global labour market slack is vast, the commodity mini-bubble appears to be bursting and the pound has fallen so far it is hard to get it to fall much further, And indeed, the MPC has stopped trying. There are however some big issues with QE as a result: It is no longer effective at boosting economic activity,and is increasingly widening economic inequality.  
 

Benjamin Profane's picture

On the other hand, the Treasury has plotted to inflate away the deficit so you might lose this bet. In the past 12 months the Government has:

  • Restricted inflation linked benefits to 1% (reducing the negative effect of inflation on tackling the deficit)
  • Given more flexibility in the BoE’s remit – i.e. the 2% target can be looked over in the search for growth
  • Ordered the ONS to change the designation of RPI as a national statistic and changed all benchmarks, except where illegal, to CPI.

They were also going to increase public sector pay by 2% for two years rather than 1%, but this was nixed at the very last moment due to competing concerns.
 
These actions are a co-ordinated attempt to inflate away more of the public deficit ahead of the next election to show greater progress nearer to the time that people are in the voting booths.

Simon's picture

Given the details of the bet you outline, it seems that Andrew has drastically watered down his inflation predictions since 2010. If only you'd made the bet then! Having said that, it doesn't say much about his economic predictive powers.
“Given the constraints of late 2008 and the absurdities of subsequent fiscal, finance and regulatory policy, if we can get away with a recession of only 6.6%, deflation of only 2% and inflation of only 10% for one year, Mervyn King will deserve a medal. To keep [RPI] inflation down to only 10% for one year, the economy will have to tolerate interest rates of perhaps 8%”.
Andrew Lilico, 2010.
http://www.investmentsense.co.uk/interest-rate-could-rise-to-8-per-cent-...