Erikka Askeland: Good fences make good neighbours, as King knows well

HE IS sitting on a fence, but it may just be that Mervyn King, the governor of the Bank of England, is leaning optimistically to one side. In his inflation statement yesterday he said yes, inflation would rise in 2011, but that this wasn't a long term danger and things would be back tickety-boo by 2013. Andrew Sentance, the hawk of the monetary policy committee, might disagree.

Inflation on the CPI measure is now 3.1 per cent. The Bank's new projections suggest it will rise to around 3.6 per cent by the end of this year, remaining above the government's 2 per cent target during 2012 but at falling to around 1.6 per cent in two years' time.

Arguments against the risk of 1970s style out-of-control inflation is that next year it will merely be gently inflamed by high commodity prices - driven in part by the US Fed's printing of money - and the VAT increase that comes into play in January. Another damp rag on the fire is mainly jobs - or a lack of them.

In normal circumstances wage inflation usually makes up a big chunk of what constitutes rises in prices. Set aside any quibbles about these being "normal circumstances" and check your pay packet. In the UK wage inflation is set to be less than 2 per cent, a wage cut in real terms. Slack in the jobs market - 500,000 public-sector jobs due to go across the UK and, in Scotland, as many as 113,000 job losses by 2015 - means UK domestic growth is kaput.

Instead we are saving what we can in case we lose our job, paying down debt, holding off on buying washing machines and shopping at Poundland. And as basics like wheat and cotton get more expensive, never mind the imported claret, this will also constrain spending. That necessary rise in global demand to help drag Western economies out of the doldrums won't be coming from here any time soon.

While the UK economy continues to look so ropey - despite some signs of unusual exuberance in GDP this year - most agree there's next to no chance of any inflation-busting interest rate raises, and there might even be the UK version of QE2 coming in 2011, which King didn't rule out yesterday either.

On one side of King's fence, inflation rises are the least of our worries. Many will be reassured that, despite King's caveat's about "vigorous debate" in the ranks of the MPC and that predicted decline in inflation being "highly uncertain", he's on our side. This is the side of business groups that are buzzing on the sugar rush of quantitative easing to ensure the economy doesn't grind to a halt. And the side of politicians who prefer to see businesses, like cranky children, pacified.

That is until we find ourselves on the other side of the fence and our pensions and savings get wiped out, and claret becomes a once a month rather than a twice a week treat.At least it might finally address that scourge of middle class alcoholism.

As we are reminded: "Inflation is like sin, every government denounces it and every government practices it."

But surely the Bank of England is not political, we cry? Except maybe it is. Turns out King's endorsement of the coalition government's austerity budget has made others at the Old Lady uneasy. Aside from King's enthusiasm, there has been no consensus at the Bank that more and faster cuts to the UK's budget would be better than the slightly softer version endorsed by the previous Labour administration.

It's a fence that should be kept built up - the Bank should really be leaving fiscal matters to politicians, and keeping monetary matters to itself. Good fences not only make good neighbours, but in this case it also provides a check to government pressure to keep the economy going at all costs. Or it should do.

Playing the numbers game is not a one-way street

THE Fraser of Allander Institute brought out some pretty scary numbers yesterday. Can we imagine Scotland losing 71,000 public-sector jobs, and a further 42,000 in the private sector, in the next four years? Pass the smelling salts.

But hold your nerve. Underneath this figure, Brian Ashcroft, professor of economics at the University of Strathclyde who writes the report, says there will only be 47,000 fewer jobs in 2012 than at the peak in 2008.

Don't get me wrong - for those 47,000 who had a job then lost it - that sucks.

But there will be economic growth, and not just that driven by rises in the number of messy discount supermarkets and antiques stores that buy gold. Another chap at Strathclyde, Colin Mason of the university's Hunter Centre for Entrepreneurship, argues more and better jobs will come perhaps from where we least expect it.

He found than a tiny cohort of firms - about 825 - account for around half of all new private-sector employment. These are Scottish Enterprise's closely nurtured flock of high-growth businesses.

The Federation of Small Businesses, which harangued enterprise minister Jim Mather at a dinner in Edinburgh last night, made a similar point: for every Scottish job which big business scrapped over the last decade, small businesses created two. All we need to do is support them. Without causing spiralling inflation. Is that too much to ask?