Here is the BBC story; here is where you can get the data.

The BBC mentions volcanic ash driving up Food prices. But as far as I can see, the things that rose hardest from March to April were not particularly vulnerable to delayed flights:

(correct me if I am wrong: I did that graph in  2 minutes and who knows what might have slipped)

My concern – and everybody’s – should be the problem Chris alluded to that may be happening in the US (via his blog) – a permanent worsening in the unemployment-inflation trade off.  If we get higher inflation for each level of capacity utilisation, the economy is in for a very poor time.  I continue to hold onto hopes that are still mentioned in the Bank’s Inflation Report – that there is still considerably slack according to surveys, that currency weakness will pass through (commodities are off their highs, driven by world economy weakness), and that working capital will be freed up, which helps drive prices lower.

If these figures DO indicate higher inflation in the future, the consequences ought to be higher Bank rates, a higher currency, and so on. Sep 11 LIBOR futures fell 7 bps on the news, indicating the former at least. If it is any comfort, they are still considerably higher (i.e. rate expectations considerably lower) than at the beginning of May – by 50bps.  However, let the comfort end there, because what probably happened since then is a general expectation that euro growth will be much lower.  That is not, in anyone’s book, good news.

(PS While I am depressing you all, see this graph of a warming world from Econbrowser.


17 thoughts on “I won’t deny it: the inflation figures suck

  1. Mervyn blames the rise on the high cost of oil, the resumption of a 17.5% VAT rate and a weak pound. He then claims that inflation will wane with time. We know that VAT is likely to rise and that the pound is weaker now than when these figures were recorded. Mervyn also claims that the slack in the economy will create downward pressure on inflation…. So surely if the recovery continues we are going to have a problem with inflation, unless we’re relying on a collapse in oil prices?

    1. He is resting on the VAT resumption an awful long time – CPI is also publiished alongside CPIY, which has tax effects stripped out. It rose by 0.5% in April.

      I still believe the theory behind the Bank’s figures – but a lot of one-offs are pointing at one big trend right now.

  2. The Governor has lost all inflation-targeting credibility. The Bank’s monthly forecast has missed 17 out of the last 21 months. Their forecast May 2009 for May 2010 missed by 300 basis points, they knew when they made the 2009 forecast that VAT would go back to 17.5% January 2010. There is obviously something fundamentally wrong with their models.

    1. “they knew when they made the 2009 forecast that VAT would go back to 17.5% January 2010”

      that is a really good point. To add to this post, but I’ll put in this comment instead, is a Stef Flanders graph:
      and Krugman post

      which show the very weak prices in the US and Spain.

      Not sure what to make of all this right now.

  3. Can I remind you and your readers of the following:

    I’ve been waiting for this: the price index drops. Innumerate right winger shouts ‘Inflation!’
    Posted by freethinkingeconomist in Economics. Tagged: deflation, Economics, Guido Fawkes, Inflation.

    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.

    I will be intermittently serving helpings of humble pie while wondering what book you are going to be sending me as a result of our wager.

    Will it be Benjamin Franklin’s “Advice to Young Man”?

    1. Yes, yes; I am not hiding from this one. Note that I post my wrongness whenever it becomes apparent. And have been thinking about the book. was wondering when Tony Benn’s next set of diaries come out.

      I still think that blowing up the base effect was an error …. but the last 4 months have been much stronger.

  4. The weird thing is you were so obviously wrong and yet chose to be so dismissive of ‘right wingers’; hubris is a fault of yours I’m afraid.

    1. To defend myself (what are the odds of that): my original post was designed to point out that BASE EFFECTS – i.e. the behaviour of prices 10-16 months ago – would be enough to ensure high inflation rates, even if the actual price index fell. This was the prediction I made, and in a sense it came true: CPIY since December 2009 (this is the CPI without VAT effects – see stats office) has fallen from 113.1 in Dec to 112.8 in April, indicating slightly falling prices if it were not for the VAT effect.

      But where I was wrong was in thinking that deflation might continue. As manuf and services surveys keep telling us, the economy is humming fairly well in some regards.

      I am guilty of hubris, in that an obvious crowing post leaves me open to risks from an unforseeable future. But the original point about base effects and seeing through the VAT return still applies.

  5. “a permanent worsening in the unemployment-inflation trade off.”

    Yes….and we know what the solution to that is as well. Supply side economics!

    No, not the mere insistence upon low marginal tax rates which is used as a dismissal of supply side. But reform of the supply side.

    A bonfire of petty regulations, the creation of a more flexible labour market (yes, this does mean reducing employment protections for those with jobs as well as getting rid of the EU rules on temps etc). It also requires going back to Layard’s work of the 80s on long term v short term unemployment. That leads us to things like reducing benefits to those who will not at least attempt to work in order to shift that Phillips Curve.

    Happy days, eh?

    1. Yes, but …

      If there is something causing the supply side to be sticky, I am not sure it is the labour market right now. Wages are not exactly rocketing -t he workers are taking their real wage hit. I bet James Doran agrees! I think it may be in the corporate sector – firms not facing enough pressure to cut prices because of barriers to entry, some of them caused by the credit crunch.

      So: yes to freeing up the supply side. Not sure to giving the workers a good kicking. Hey, what a liberal am I

  6. “If there is something causing the supply side to be sticky,”

    Interesting snippet in WSJ today. The cost of Greece’s administrative burden is 7% of GDP….about twice EU average. That’s the EU’s own estimate.

    I’d say that our own is at least that high….get rid of that and have a nice bounce in GDP growth…

    1. How to you make that estimation? I only have anecdotes, but I have heard in general that our public administrators are generally envied, whilst the Greeks are paid extra for turning up, extra for wearing the right clothes, and so on.

      Not sure how one measures an administrative burden. We need SOME administration in life – good admin improves efficiency. Get what John Kay, no statist, says about the NHS:

      “Part of New Labour’s difficulty was that there was not much agreement on what better management would entail – and little has changed. It is easy to fulminate about bureaucracy and the need to concentrate on frontline services, but the National Health Service is under-managed not over-managed. Those with responsibility for running it lack authority, squeezed between Whitehall and the power of medical professionals, with the result that the calibre and morale of health service managers is low. The Tories aim to tackle very similar issues in education through decentralisation and greater autonomy. But even if their proposals are successful they will not lead to lower expenditure in a relevant time frame.”

      This one needs some empirical research, I think, not first-principles. Which entitites in our supposedly free and competitive market economy have been given too much market power by recent events and crises? In the 1970s it was labour. The profitability of UK companies suggests that is not the major issue now.

  7. “The profitability of UK companies suggests that is not the major issue now.”

    What on earth is an economist doing using the high profitability of extant companies as proof of a light administrative burden on corporate activity?

    It’s usually taken as meaning the opposite: that high regulatory barriers impede the creation of new competitors and thus allow incumbents to make excess profits. Monopolies and oligopolies are, after all, notably more profitable than companies in competitive markets…..

    1. “What on earth is an economist doing using the high profitability of extant companies as proof of a light administrative burden on corporate activity?”

      Erm, his job?

      Really, Tim, you’d never get anywhere as an economist being so honest about corporate domination of supposedly “free” markets… 😉

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