The TPA, Household Debt and Inflation
My good friend’s at the TPA have responded to my False Economy post on household debt. Leaving aside the sniping (I’m a ‘hack’ apparently), their key argument is that the higher household debt forecasts are due to higher inflation (’the colossal elephant in the room’).
Fair enough, although the basic problem with this argument is that the OBR haven’t really revised their inflation forecasts by all that much.
Since their June pre-Budget forecast they have revised up the 2011 CPI forecast from 1.6% to 4.2% and the 2012 forecast from 2.0% to 2.5%. They have made no changes to their forecasts for inflation in 2013, 2014 or 2015. The ‘elephant in the room’ isn’t really so large.
It seems unlikely, to say the least, that a relatively minor (and temporary) increase could cause such a large increase in the household debt forecast.
But then ‘inflation’ is the right’s new best friend – household debt rising? Blame inflation. Government borrowing an additional £45 billion? Must be inflation.
As Chris Dillow wrote two weeks ago this excuse, in relation to higher government borrowing, is ‘drivel’.
For what it’s worth I’ve emailed the OBR asking for more detail on their household debt forecasts and the reason for the increase. But let’s remind ourselves – back in June they forecast that household debt/income would fall every year until 2015, now they expect it to rise every year. It seems unlikely that two years of higher inflation could cause such a large effect.