Duncan’s Economic Blog

The TPA, Household Debt and Inflation

Posted in Uncategorized by duncanseconomicblog on April 4, 2011

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.

10 Responses

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  1. Newmania said, on April 5, 2011 at 11:49 am

    Well you do work for the Labour Party so its not as if we can rely on you for an honest opinion . Its a line to take I guess and I think the point of household debt is to confuse the issue on taxes ,spending and national debt by professing mock horror at predictable results of tough times but get the word “Debt” in there .
    I would not be at all surprised if this didn`t come directly from the Balls attack dog kennel

    • duncanseconomicblog said, on April 5, 2011 at 11:54 am

      I don’t actually work for the Party for anymore…

      Or if I do they seem to have stopped paying a good 9 months ago.

      • Harry said, on April 6, 2011 at 7:40 am

        Duncan You have a bent towards the Labour party. When you have been caught out in this way, its best to just acknowledge the criticism.

        Your reputation is being discussed here.

        • Mike said, on April 6, 2011 at 8:25 pm

          Duncan has an excellent reputation as an impartial and objective economics observer.
          To accuse him otherwise is dishonest (and cowardly).

  2. Luis Enrique said, on April 5, 2011 at 1:43 pm

    I do wish they’d distinguish between inflation (prices and wages rising together) and falling real incomes (prices rising faster than wages). I don’t see what the former has to do with household debt, the latter has intuitive appeal (borrowing in an attempt to maintain consumption levels) but even that’s not necessarily true – you can respond to reduced real income by cutting consumption.

    • duncanseconomicblog said, on April 5, 2011 at 1:45 pm

      I assume (from the FT coverage) that is means more BarCap business and credit market activity rather than SME lending.

      But yes, fair point.

    • duncanseconomicblog said, on April 5, 2011 at 1:47 pm

      If the TPA wrote ‘falling real wages are the probem’ I’d be over the moon…

  3. Household debt and inflation said, on April 6, 2011 at 9:09 am

    […] a spat going on between Duncan Weldon and the Taxpayer’s Alliance over Osborne’s Budget last month and in particular, the causes of […]

  4. jomiku said, on April 10, 2011 at 11:51 pm

    I thought Osborne said the plan would lower inflation. I know you linked to Posen discussing lower inflation – 1.5%.

    Being American, I don’t care about the politics, just the economics.

    • duncanseconomicblog said, on April 11, 2011 at 9:42 am

      The Bank’s inflation target, set by the Chancellor, is 2% (CPI).


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