Guido is SO confused on this one.  Because he seems not to understand how annual inflation figures are created, he presents the first fall in the index as proof that INFLATION is settling in.  Proving my prediction in a post a few weeks back:

How the Right will be screaming ‘Inflation’ as we go into deflation.

So what figures have come out?  Here is a graph of the CPI index:

In fact, when you use CPIY – which is I think the CPI without tax effects – you get this startling picture:

CPIY inflation has fallen from 2.7% to 1.9% in this month.

So Guido the Innumerate screams Inflation!! and his trolls all say Aye Aye sir.  As the price index drops.

UPDATE:  Hooray!  I knew the Telegraph still has what it takes.  Jeremy Warner calls ‘There’s not much sign of deflation in these latest numbers’. Um, how about the tax adjusted price being 2 points lower in January?  BUT I also ought to point out seasonal effects I had not clocked the first time (foolishly); January is on average 0.5-0.9 pips lower than December, for obvious reasons.  Still, the fact that it was lower by 0.2, despite VAT rising, is a strong indication for me that CPI inflation is scarcely a threat.

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14 thoughts on “I’ve been waiting for this: the price index drops. Innumerate right winger shouts ‘Inflation!’

    1. As an ex-bookie, I insist you define your terms, then I’m happy to have a small wager. Though I would like to point out that going off the BOE’s fan charts you have an odds advantage.

      How about: a tenner/book of your choice (not a Chaucer original) on whether CPI inflation busts the lower limit (1pc) within 18 months? You are surely odds-on to win

  1. Errm, deflation is <0%, CPI @ 1% is inflation. I think you need to re-define your terms. Agree terms and I'll do a book of the losers choice bet.

    A few points I'll make briefly:

    The BofE didn't predict this yet they knew the VAT hike was coming.
    Inflation is trending upwards regardless of VAT.
    You can't just ignore tax, it is a real cost and it is inflationary hits people in the pocket.
    Oil and other commodities are inflation components that don't point to deflation.
    Sterling weakness is inflationary and if it were not for Greece would probably be at or near parity with the Euro.
    Despite it being, as you say, negative last month saw the strongest ever growth in consumer prices on record, as prices usually fall significantly in the January sales. The official headline figure is still 3.5%.

    As for Guido being innumerate, well, it makes a good headline. I suggest you look at my real-time portfolio, not many traders update an open book trade-by-trade. I have been reporting my trading for the last two years:

    Up 15% Y-T-D
    Up 40% 2009
    Up 97% 2008

    To be fair, the computer does the adding up. I spent the best part of a decade thinking about bond markets, interest rates and inflation for a living. It drove me to drink. I have learnt that when people disagree on economic forecasts it is not that one is right and another is wrong, because we are dealing in probabilities dependent on too many variables for reliable calculation.

    1. Look, those are all fair points and I take back the bit about ‘innumerate’ – perhaps just selective about what you wished to revealed in the headline? I asked Sunny this morning to remove that word from the LibCon piece because it is clearly unjustified.

      You will have noted the gilt market reaction. My point about tax is clearly not ‘it doesn’t matter’ but ‘one off in and out taxes have scrambled the data’.

      I have always been on the other side of the traders – chief dealer at IG index – and it is a much easier life. The only thing it drives you to is coffee. And the bank, laughing. And, yes, we are dealing in a probability distribution here, and yes inflation is a cost for people. But as Willetts observes it let off the whole generation before us from their mortgage debts.

      Alright – if at any point in the next two years CPI growth goes negative for a six-month period, I’m right – otherwise you’re right. How is that? Then if the Bank takes my advice to crank up the programme, it won’t happen. I’m betting on the Bank not doing its job well.

    2. By the way, my portfolio also had a stellar 2009: mostly because I sell vol. Not so much a genius as foolishly brave…

  2. I am glad to see Guido Fawkes humbled a little; he started off as a Robin Hood but has evolved into Judge Jefferies with his unpleasant articles about Snouts in the Trough and holier than thou style.
    .
    He doesn’t see that his own trade as a hedgefunder is kind of parasitic lifestyle; that making a living by speculating on shares is hardly an honourable trade; to rant so about MPs who speculate a little on
    expenses is hardly justified in one who himself lives by speculation.
    If Guido’s site makes me a little sick I have only to read a few of his disciples comments to confrim my view.

    1. and, to be honest with you, I am not in total agreement about hedgefunders and parasites… this would take another post to explain, however

  3. I’ll take that bet. If CPI < 0 for 2 quarters in the next 2 years you win a book of my choice. Otherwise I expect to receive a book from you.

    That article from the Indy is very good

    "A year ago the Bank thought that inflation by now would be close to 1 per cent. Indeed the very top end of its expected range for the CPI was 3 per cent. So it has been completely wrong. And it has been wrong despite the fact that the recession has been somewhat more severe than it expected then. We all make mistakes, but that was a big one."

    Beth, I don't trade shares. But people who do are taking risks financing the growth of businesses that provide jobs, goods and services. That is not being a parasite that is investing in people and the future.

    1. Agreed. I expect Tony Benn will have another volume of his memoirs ready by then ….

      It’s just occurred to me that they will put up VAT again. Damn, I’m going to lose this one, big time.

      Good point re. the Indy’s article. Bank has systematically got it too low. I like the explanation, though, that the credit crunch makes price cutting strategies too cash-costly (though I am beginning to talk my book).

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