Archive for the ‘Inflation’ Category
Wednesday, August 11th, 2010
It will be several years before the economy gets “back to anything we can call remotely normal”, said the governor of the Bank of England, Mervyn King in the Bank’s August Inflation Report.
Personally I would hate to be seen as normal, but there is something quite reassuring about having that name applied to the economy. However, we are not going to see ‘normal’ again for years in the UK.
The Bank downgraded their forecast for economic growth next year from 3.5% which was in their May report, to 3% in the current report. Mr King said: “The UK recovery is likely to continue, but the overall outlook is weaker than that presented in the May Report, reflecting the softening in confidence, the persistence of tight credit conditions and the faster fiscal consolidation.”
However, there is a big gap between the forecasts made by the Office for Budget Responsibility (OBR) and the Bank. The OBR has forecast growth of 2.3% for 2011 and 2.8% in 2012. In fact the general agreement in the City is more with the OBR forecast.
What does the Bank see as the downsides to growth? It is felt that the lack of bank lending will limit growth and it is expected that it will take many years for bank balance sheets and fiscal positions to return to anything like normal.
On the plus side was the fall in the value of the pound and the continuing effect of the economic stimulus.
As far as inflation is concerned, the Bank expects CPI, currently at 3.2%, to remain over its 2% target until the end of 2011. This is because the effect of the increase in VAT from 17.5% to 20% from next January will drop out of the price comparisons twelve months later.
Mr King thought that continued inflation above target would not raise inflationary expectations and that there would not be a response of higher wages causing an inflationary spiral. He backed this up by pointing to the slack in the labour market which has an extra million people out of work compared to pre-crisis figures, which is causing downward pressure on pay.
In the meantime we will have to tighten our belts. Not only metaphorically, but literally too for far too many people.
Tags: Bank of England, economic growth, Inflation, sterling
Posted in Bank of England, Inflation, economic growth | No Comments »
Monday, July 19th, 2010
The UK is suffering far higher inflation than most people expected at this stage of the economic cycle. Our inflation is well above that in the US and EU. What are the reasons for this and what implications can we expect?
Roger Bootle has tackled this question in an article in the Telegraph.
He believes that one-off factors have been the main influence on inflation, including the fall in the value of the pound, and putting VAT back up to 17.5%. But he poses the question as to why those that have this view have been expecting inflation to fall and it hasn’t.
He suggests three possible explanations. Perhaps the excess capacity in the economy which we are expecting to force inflation down, doesn’t in fact exist. However, why should this affect us and not the US and eurozone? Also, the fact that we have 8% unemployment would suggest that there is evidence of excess capacity.
The second explanation is that even if there is excess capacity, there is some reason at work which is stopping it from reducing inflation. He suggests that one possible answer is that as firms face a fall in demand they are pushing up prices in order to maintain profits. Firms are perhaps desperate to maintain cash flow especially as banks are reluctant to lend at the moment.
His third possible explanation is that expectations of future inflation have become dislodged. The fact that inflation has been above target for so long, the Bank of England has resorted to Quantitative Easing, and the dark possibility that the government is quite happy with higher inflation as it reduces real debt levels are all possible contributors. However, Bootle does not accept this explanation, particularly as wage growth is relatively subdued.
He points out that in 2007-08 the pound fell by around 25% and given the importance of the traded sector of the economy, the direct effects of this alone would raise the price level by about 8%, irrespective of other knock-on and second-round effects, especially on wages.
He concludes that the implications for inflation are “decidedly favourable”.
Tags: excess capacity, expectations, Inflation, Pricing, sterling
Posted in Consumer Price Index, Inflation, sterling, unemployment | No Comments »
Tuesday, May 18th, 2010
CPI annual inflation which is targeted by the government at 2.0%, rose to 3.7% in April from 3.4% in March according to figures released this morning by the Office for National Statistics.
The largest pressures on prices came from clothing and footwear which rose by 2.2% and was particularly fuelled by increases in the price of women’s clothing; widespread increases in food prices which went up by 2.6% overall, much of which was blamed on the closure of European airspace due to volcanic ash from Iceland (the country, not the retailer); and, a 2.1% hike in alcohol and tobacco prices due to higher duty imposed in the last Budget.
The recent trend in inflation can be seen in the graphic below.
 Annual Inflation rates: 12 month percentage chage Source: ONS The Retail Price Index, which is used as a guide in agreeing some national wage settlements, actually rose to 5.3% in April, which was the highest figure since July 1991 and compares with 4.4% in March. Not only was this affected by the same elements which caused CPI to rise, there was also an additional upward pressure from housing costs. This was particularly due to mortgage interest costs. Although these only rose by 0.6% in April this year, this compares with a 7.7% decrease a year ago as a result of the reduction in Bank rate from 1.0% to 0.5%.
It is these year-on-year comparisons which make interpreting inflation figures quite tricky. Even if mortgage interest costs had fallen slightly this year, there would still have been an inflationary impetus as they fell by such a large amount 12 months ago.
RPIX inflation, which measures the RPI minus mortgage interest payments, was 5.4% in April compared to 4.8% in March. And, compared to the EU, UK inflation rates are well ahead. Latest comparable figures for March show an EU average of 1.9%, compared to the UK’s rate of 3.4%. This comparative difference will offset some of the gains from the decline in the value of sterling, as UK exporters try to compete in EU markets.
Tags: CPI, EU, Inflation, RPI, RPIX, sterling
Posted in Consumer Price Index, Inflation, Interest rates, Monetary Policy Committee, sterling | No Comments »
Friday, May 7th, 2010
Well to be strictly accurate it will be from the Queen’s Head. I’m meeting Skipper Harrison and some of the lads down there for a celebratory drink. We’re used to late night sittings, so this running the country stuff should be a bit of a doddle.
The first thing we will have to do is choose a cabinet. I know Skipper’s got his eye on a teak one which holds lots of bottles, and where the little light comes on when you open the doors.
We’re planning to make the tough decisions no one else wants to tackle. The first thing that we’ve decided to do is abolish the Treasury. Those guys couldn’t work out which way the wind was blowing during a hurricane. So, time for a change. We are going to replace it with the Department of Professional Economists, or DOPE for short.
If you are interested in the position of Chief Dope you can apply using my bank account details at the end of this message.
We obviously need to get the economy booming again. The way we are going to tackle this is to ensure that the rate of inflation is always higher than the rate of return on savings, ensuring that the real value of savings will continually fall. This will result in individual savers and pension funds liquidating their holdings and pouring billions of pounds into consumption. Of course, it makes even more sense to buy now before prices go up even further. This will raise GDP to well above the EU average and result in a higher tax take.
So, problem solved. We can then concentrate on getting new roofs on our duck houses. This could be used as work experience for the unemployed.
Our policies will then result in higher consumption, increased GDP, soaring government revenues and lower unemployment. I think we deserve that other drink now. It’s easy when you are a real economist.
Unfortunately, in the make-believe world of politics things will probably be very different. Everyone is talking about a hung parliament and a coalition government. My guess is that the Liberal Democrats and Labour will get together to form a new party called Libor to run the country. They will rely totally on borrowing from investment banks with Golden Sacks and Lemming Brothers being the main contributors. This way to the edge of the cliff, everybody.
Tags: GDP, government revenues, Inflation, Interest rates, investment banks, savings, tax take
Posted in Fiscal stimulus, Gross National Income, Inflation, Interest rates, economic growth, government borrowing, savings, unemployment | No Comments »
Wednesday, April 21st, 2010
So, inflation is still on the rise. The government’s target measure of CPI rose from 3.0% in February to 3.4% in March.
This was mainly due to the cost of gas and petrol prices and a spike in food prices. A weak level of sterling is coupling with very high prices for oil and other commodities, and on top of that poor weather in Spain has added to food prices. Also, there may be a knock-on effect on food prices as a result of the UK becoming a no-fly zone over the past week – with dwindling supplies of some foods in the shops.
The RPI measure of inflation was 4.4% in March, up from 3.7% in February. This was affected by the same factors as the CPI but also a rise in mortgage interest payments. RPIX inflation, which excludes mortgage interest payments, was up to 4.8% in March from 4.2% in February. The recent trend can be seen in the graphic below.
 Source: ONS The latest comparable figures for CPI inflation show that the UK rate of 3.0% in February was far higher than the 1.4% for the EU as a whole.
What then are the consequences of this continued rise in prices?
Firstly, savers are suffering. Real interest rates are actually negative at the moment, and according to the Moneyfacts website the average no-notice account after tax and inflation is standing at a very enticing minus 2.82%.
Secondly, there could be an impact on wages and employment. Wage growth has been very restrained in the private sector but many wage settlements take RPI into account. With some economists suggesting that RPI could rise as high as 5%, this is likely to put some pressure on wage settlements. Given the delicate nature of the recovery this could well have a major impact on employment.
Finally, how is the Bank of England going to react? There will certainly be pressure on the MPC to raise interest rates although the governor of the Bank of England, Mervyn King, has maintained that he expects inflation to full back towards its target level over the coming months. A hike in interest rates will doubtless damage the recovery. However, the measure for core inflation, which removes the more volatile items in the measure, only rose from 2.9% to 3% last month, so perhaps pressures are not as great as they seem.
Tags: Bank of England, core inflation, CPI, Inflation, Interest rates, MPC, RPI, RPIX, savings, wage rates
Posted in Bank of England, Consumer Price Index, Earnings, Employment, Inflation, Interest rates, Monetary Policy Committee, sterling | No Comments »
Tuesday, March 2nd, 2010
Why did sterling fall to a 10-month low against the dollar yesterday? The answer is that it was mainly driven by political concerns. With the latest opinion polls showing that Labour is closing in on the Conservatives, the prospect is that we will have a ‘hung parliament’ this summer, which means that no single party will have an overall majority.
The concern in the markets is that in such an event parties will be jockeying to do deals with other groups, in order to form a government. Whilst this might suggest that we could end up with some sort of consensus government, the fear remains that our ‘government’ would stumble around trying to put together a cohesive policy to deal with the UK’s debt deficit.
It seems the markets are looking for a strong policy response to deal with our financial problems irrespective of which party is applying the axe to the spending budget. In fact, yesterday the pound fell four cents against the dollar, falling just below the $1.50 barrier for the first time since last May. Sterling has dropped 7% against the dollar this year alone. Sterling also fell to its lowest point in four months against the euro to reach 91.5p. Some commentators feel that the pound will fall below parity with the euro in the coming months.
The foreign exchange markets are currently very volatile due to concerns about whether the UK can raise sufficient borrowings to fund its debt, and more particularly, whether the leading credit agencies will reduce our ratings below the current AAA, which will lead to a rise in the cost of borrowing. More than that, the evidence shows that powerful hedge funds are betting against both the pound and the euro. George Soros, the billionaire investor who runs Soros Fund Management, is quoted as saying “the euro may not survive” and is currently buying into gold.
On a positive side, the fall in sterling will give additional impetus to our export sector as our goods and services will become relatively cheaper internationally. On the other hand, the price of imported goods will rise, putting even more pressure on UK inflation.
Tags: euro, Exchange Rates, government borrowing, Inflation, sterling
Posted in Exchange Rates, Inflation, International Trade, Public Finances, government borrowing, government spending, sterling | No Comments »
Thursday, February 25th, 2010
Paul Tucker, who is a member of the Monetary Policy Committee and Deputy Governor for Financial Stability, has just given a speech in which he discusses some of the current challenges facing monetary policy and issues relevant to the overall framework for preserving macroeconomic stability.
First, he discusses the effects of household and bank balance sheet repair on aggregate demand, which pose a downside risk to the outlook for activity.
Second, he considers how supply capacity has been affected by the recession.
Third, he notes the volatility of inflation and its impact on medium-term inflation expectations, which the MPC has to be sensitive about.
And, fourth, he discusses how the monetary effects of the MPC’s asset purchases may come through gradually, and how they may have assisted the process of de-leveraging by banks.
 What lessons can be learned from the recent crisis? He also looks at what lessons can be learned for maintaining macroeconomic stability, and discusses how the evolution of the financial system can alter the transmission mechanism of monetary policy and the sorts of data that need to be analysed when assessing it.
In conclusion, Paul Tucker states that: “…it is the credibility of our commitment to price stability that has enabled the Bank to cut interest rates and to inject money so aggressively in order to support nominal demand in the wake of the credit crisis… That underlines the risks of tinkering with central bankers’ inflation targets….” But another element of stability – in the financial system – needs to be addressed. He says, “…macroprudential instruments …could be used to lean against future credit booms and for making our financial system more resilient. If we could manage that, it might be the most significant extension in the overall international macro policy framework in a generation.”
To read his talk in full click here.
Tags: Bank of England, growth, Inflation, macroeconomic stability, quanititative easing
Posted in Bank of England, Inflation, Monetary Policy Committee, economic growth | No Comments »
Wednesday, February 17th, 2010
The Consumer Prices Index (CPI) rose to 3.5% in January from 2.9% in December. According to the Office of National Statistics (ONS) this is the second largest ever increase in the annual inflation rate between two months. It follows on from the record increase of 1.0% in the annual inflation rate between November and December.
The reason for the increase was due to the restoration of the VAT rate in January to 17.5% and the increase in the price of petrol. This time last year petrol was 86.3p a litre and has now risen to 110.9p per litre. There was also an increase in some food prices with cauliflowers rising in price by 59.7%.
Because the CPI deviated more than 1% from its official target rate of 2.0%, the governor of the Bank of England was forced to write a letter of explanation to the Chancellor. In this, Mervyn King wrote that the committee saw this as a “temporary deviation”. He said: “Although it is likely to remain high over the next few months, inflation is more likely than not to fall back to the target in the second half of this year, as the short-run factors wane and the influence of spare capacity builds.”
The RPI measure of inflation, which is often quoted in wage negotiations, rose from 2.4% in December to 3.7% in January. The largest upward contribution to this change came from housing. This is because mortgage interest payments rose this year but had fallen significantly a year ago, when the majority of lenders passed on the decline in Bank rate which fell from 3.0% to 2.0%. This is the highest RPI figure since October 2008 and is the first time that RPI has exceeded the CPI figure since August 2008.
 Source: ONS The RPIX measure, which excludes mortgage interest payments, rose from 3.8% in December to 4.6% in January. And, what is particularly of interest, is that underlying inflation which excludes more volatile elements such as food and fuel, rose from 2.8% to 3.1%. This suggests that there are underlying pressures on prices, which could partly be due to the weakness of sterling, which is pushing up import prices.
UK inflation can be very difficult to budge and when looking at the December figures the UK CPI inflation rate stood at 2.9% compared to only 1.4% in the EU as a whole.
There are big implications of this jump in inflation for savers. Moneyfacts, who are experts in personal finance, suggest that with a typical savings account offering instant withdrawal only offering 0.73% in interest, basic rate taxpayers are losing the equivalent of 2.92% a year, and higher rate taxpayers are losing 3.06%.
Although the Bank feels that inflation will be back below target in the coming months, this could be upset by attempts to rectify the budget deficit after the election. Many City economists now believe that VAT will be raised to 20%, which will have a large inflationary impact if it comes to pass.
Tags: Bank of England, CPI, Inflation, MPC, RPI, RPIX, savings, sterling, underlying inflation, VAT
Posted in Bank of England, Consumer Price Index, Inflation, Monetary Policy Committee, savings, sterling | No Comments »
Thursday, February 11th, 2010
“The UK economy has continued to bump along the bottom, but a gradual recovery in output may now be in prospect.” This was the view of Mervyn King, governor of the Bank of England, in launching the Bank’s quarterly Inflation Report.
The Bank said that the strength of the recovery is “highly uncertain” and “the pace of recovery is somewhat less strong than three months ago.” The current forecast is that Gross Domestic Product could rise to 3.2% by the second quarter of 2011, although this is well down on the earlier prediction of a 4.0% rise.
The Report also said that: “At home, the tailwinds of an enormous policy stimulus and the depreciation of sterling are meeting the headwinds created by the balance sheet adjustment of the damaged banking system. Spare capacity will press down on inflation in the medium term. But the near-term outlook is for inflation to rise further.”
 The Bank said that growth will be slower than anticipated. In fact, the Bank is predicting that January’s inflation figure will rise above 3.0%, whilst maintaining that this is only temporary, the result of the increase in VAT back up to 17.5% and a rise in petrol prices. However, it is predicted that inflation will thereafter fall back fairly rapidly below the 2% target rate, and would fall as low as 0.9%. It is thought that inflation could remain below the target rate for several years.
This probably means that we will not expect any increase in interest rates for some time, with the present rate being maintained at 0.5%, giving the temporary nature of the rise in inflation and the precarious nature of the economy recovery. Mr King left open the prospect of more quantitative easing and said that more purchases may be necessary to keep inflation on track.
Tags: Bank of England, CPI, economic growth, Inflation, target 2.0
Posted in Bank of England, Consumer Price Index, Inflation, economic growth | No Comments »
Friday, February 5th, 2010
The Bank of England decided yesterday that they would call a halt to their experimental, not to say unprecedented, policy of quantitative easing (QE). QE was started in March 2009 and over the following months the Bank bought up £200bn of gilts in the open market from banks and financial institutions. This was aimed at preventing the economy falling into an even deeper recession and pushing increased liquidity into the economy via bank lending.
Has it been successful? It is always difficult to know. How bad would it have been without it? A couple of days ago a think tank, the National Institute of Economic and Social Research estimated that QE had increased output by 0.5% in 2009 and would contribute an additional 1.0% growth this year.
 Quantitative easing and interest rates both put on hold.
In making their decision to suspend QE the Bank’s Monetary Policy Committee (MPC) decided that: “…this stock of past purchases, together with the low level of Bank Rate, would continue to impart a substantial monetary stimulus to the economy for some time to come.” The MPC also said that: “…further purchases would be made should the outlook warrant them.”
The MPC is torn between the fact that GDP only increased by 0.1% in the final quarter of 2009 and may require further stimulation. Yet, CPI inflation rose to 2.9% in December, above the 2% target. However, on balance the MPC decided that: “…the scale and persistence of the fall in output means that a substantial margin of under-utilised resources is likely to remain for some time to come. That is likely to mean that inflation will fall below the target for a period.”
The Committee continued to leave interest rates at their historic low of 0.5%.
Tags: Bank of England, CPI, gdp growth, Interest rates, Monetary Policy Committee, quantitative easing
Posted in Bank of England, Consumer Price Index, Inflation, Interest rates, Monetary Policy Committee, economic growth | No Comments »
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