Most worrying paragraph of the day so far:

‘Core CPI grew at 2.8 percent, the fastest rate since 1997’

Could it really be that the economy is hitting its real limits, despite such a drop in production? Surely not even the most hawkish MPC member could think that.

Simon Ward has been ahead here – read his blog, whenever you can.


9 thoughts on “Inflation figures

  1. Does this month include the rise in VAT? Assuming that half of this has fed through to customers, and assuming that two thirds of the bundle of goods in the inflation index are covered by VAT, then arithmetically the rise in VAT accounts for 2.5/1.15 * 0.5 * 0.67 = 0.7 percentage points of the rise, that is, CPI inflation without the change in VAT would be approximately 2.2%. still quite high, but not as high as the headline figure suggests

    1. I think what it includes is the dropping out of the price falls 12 months ago that followed the cutting of VAT – the rise again happens next month. There is a question mark over whether some shopkeepers have raised prices before the VAT rise, so there may be less to come next month.

      What bthers me is that the consensus estimates – from economists who clearly know about the VAT – are still being beaten on the upside, every month. I would stick my neck out, though, and argue that with public sector pay restraint, continuing private restraint, the pound actually higher than in March, and a long fiscal squeeze ahead, we can’t have runaway inflation.

      The Spectator is rubbing its hands with glee . . . .

      And as my friend pointed out:

      “Note that the pound also strengthened (presumably in response to feeling will hasten end of QE) which is not the sign of the market expecting hyperinflation! “

  2. If my arithmetic is right, but applies to next month, then assuming presumably there is a chance of inflation at 3.5%. It is not stagflation, but unless it comes down sharpish, I don’t think that the Bank’s credibility would survive leaving interest rates too low, too long. Their mandate is on inflation, not the wider economy. My guess is that they would be reluctant to raise % before the election, but they could end or reduce QE.

  3. And I’m not sure what Ward is crowing about:

    “the headline CPI rate jumping to 2.9% from 1.9% in November. This confirms the earlier forecast of a rise above 3% in early 2010”

    How does that “confirm” a 3+% prediction? If it rises above 3% next month then it’ll be confirmed. But not till then.

    “From 2.8% in December, the headline rate may reach 4-5% this spring.”

    For the life of me I can’t see that happening.

    1. Alex

      I think because of base effects, the result that Simon Ward predicted may be all but certain. Yes, VAT made the difference, but I think Tim’s point about their credibility/reputation of the Bank is true and worrying – if enough people think INFLATION it starts gaining traction, which prevents QE becoming effective.

  4. Morning Giles,
    You write “if enough people think INFLATION it starts gaining traction, which prevents QE becoming effective.”
    Am I being thick? Surely if people think inflation and it gains traction, hasn’t QE (or something) worked?
    Isn’t the theory that when people start thinking a purchase today is better/cheaper than one tomorrow (reversing the deflationary mindset), or firms start thinking that their customers will start thinking that prices will be higher tomorrow and start buying again, that those firms start producing more in anticipation. Then, as soon as firms anticipate that their spare capacity will soon be used up, they start making positive investment decisions. Like a piston and a drive shaft changing direction towards the end of a disaster movie.

    The caveats in the above are there because I think hype is more important than QE in this process. Your Bond Vigilantes seem spot on to me, rationally, but if those who need to sell their punditry and those who need to win elections or those who need to gain credence for themselves within their party hype it up enough, then, the piston may change direction.

  5. (on mobile)
    Bill, thanks for picking me up on that. I expressed myself badly – what I meant was that a hint of lost credibility for the Bank might see it tighten too early. Higher mortgage costs; lower asset prices; weaker exports – all these income effects would swamp any (minor) substitution effects from higher expected prices. Firms faced with higher wage bills but no higher demand will just lay off workers.

    Higher inflation expectations are not necessarily stimulative if they appear to come from a supply shock … in my view

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s