Tuesday, 12 August 2008

More terrible inflation numbers

Since the beginning of the year, the UK inflation rate has steadily deteriorated. Today's numbers were particularly grim. The headline CPI rate hit 4.4 percent, jumping 0.6 percent in just one month, hitting a 15 year high. The rate has increased in 9 out of the last 10 months, and it is now 2.6 percent higher than a year ago. As for the government's 2 percent target, it is now a dim and distant memory.

The numbers from the more accurate the retail price index numbers were worse. The RPI inflation rate is now 5 percent. Ironically, mortgage payments have been putting downward pressure on inflation. If this item is extracted from the RPI series, then inflation is running at 5.4 percent.

It isn't too hard to see where the inflationary pressure is coming from. Food inflation has gone retro; we are back to 1970s levels of food price increases. This month, the food inflation rate was over 13 percent. This number is even more extraordinary considering that back in the middle of 2006, food inflation was actually zero.

Looking forward, the underlying inflationary indicators are all extremely bad. Producer price inflation is in double digits. Input price inflation is now running at 30 percent. It all suggests that inflationary pressures are increasing not diminishing.

This points to the distinct possibility that inflation could hit 5 percent by the end of the year. All it would take would be the monthly CPI inflation rate to be around 0.45 for the rest of the year. For the first six months of this year, the average monthly rate has been 0.4, although in the spring, the rate was well in excess of 0.6.

For the MPC, today's number must produce more than a twinge of regret. A more robust response to inflationary pressures a year ago would have limited the extent of inflationary pressures that are all to evident today. Since the first signs of renewed inflation appeared, the MPC took a gamble, cut rates and lost badly.

For the MPC the dilemma has become more acute. With inflation rapidly approaching 5 percent, inflationary expectations are bound to rise. Wage setters are quickly picking up the signal that the MPC is scared to raise rates. Therefore, it is only sensible to conclude that the BoE will accommodate higher wage increases. Given that these are the new rules of the game, only a fool would not push for at least a 5 percent or more pay increase next year.

The MPC has only one way out of this mess; raise rates. The sooner they do it; the sooner everyone else will understand that any further acceleration in inflation will not be tolerated.

So far, the MPC seem reluctant to take any tough decisions, preferring to keep them on hold in the hope that something might turn up. It seems more inclided to ride its luck, hoping that a modest slowdown in activity might have a huge impact on price pressures. Unfortunately for the rest of us, the committee appears to be a little short on good fortune right now.


MAB said...


We are facing similar cost of living increases in the U.S. The forecasts for inflation by the fed and the markets have been wrong here for five years running. Oddly, there is very little outrage. It seems people still can't let go of the dream of free wealth through asset inflation.

I'm curious, are incomes in the U.K. and the Euro zone keeping up with the measured cost of living?

aSteve said...

It is a beautiful picture, isn't it?

As I expect you've picked up, I've a broad respect for the MPC and Mervyn King, in particular... and I know you have graver doubts than me, Alice.

To paraphrase King, the inflationary effect on prices in the CPI is short-term. The only possible reason for this is an expectation of massive corporate failure and bankruptcy in the near future - and that this will kill the wage/price spiral.

If interest rates go up, bankruptcies will go through the roof. It is a tough call, but the economy is going to hell in a handcart however rates are set.

Anonymous said...

I'm sort of with asteve on this one. I think now the commodity bubble has burst and the hedgies are unwinding the "equity-crack" trade (see Financial Ninja for better discussion), this short-term CPI rise will soon be a thing of the past.

Even now, I'm quite happy to pay an extra £20 a week on my food and energy knowing the house I intend to buy is dropping £500pw. Hell, I'm happy if my food bill doubles so long as those houses keep tumbling.

And while everyone else is slitting their own throat through debt, I'll just stand still projecting and air of serene calm.


Mark Wadsworth said...

Tee hee.

My chum at work said Mervyn King's going to stop writing letters and write a whole book.

Alice Cook said...


I think you are being a bit complacent about inflation. If you look at the charts more closely,you will detect a long term deterioration that goes back to 2005. Input and factory gate inflation is positively scarey. Overall, I don't think inflation is going away any time soon.

The other factor is monetary growth, it hasn't slowed down by as much as you think. I will shortly do a chart looking at total US credit growth. Outside of the housing market, it hasn't fallen by that much.


Matt said...

I don't think the CPI is really a good measure of inflation. The real inflation figures mentioned by John Major is perhaps even more worrying.

Real rate of inflation

It's about time to go on a diet!

MAB said...


I'm with you. I still see stubborn CPI inflation ahead. Over-valued assets reverting towards trend is not deflation by any rational definition. Write downs and write offs of foolish loans are inevitable. Better to get it over with.

The U.S. fed has a bizarre view of the world. They believe U.S. citizens cannot take care of themselves and therefore should kneel at the alter of finance. Consider that in the U.S., the top 1% of wealth holders own 60% of all stocks and bonds. Apparently, the fed views a continuation of this trend as a positive.

I don't see how the asset inflation game in the U.S. can continue. Wealth has become extremely concentrated. The vast majority have been decimated. An epic swindle. A serious bout of CPI inflation willl be a monster burden.

Anonymous said...

"The other factor is monetary growth, it hasn't slowed down by as much as you think"

There's real problems measuring that. I think Mish's many deflation posts answer it.

"Over-valued assets reverting towards trend is not deflation by any rational definition."

Deflation is EXACTLY what that is. Credit is being destroyed.


MAB said...


Regarding Mish. Who really cares if bogus, ill-advised credit gets destroyed. Seriously. It's the monetization that follows reckless lending that is hurting the majority. Real wages in the U.S. have fallen for over three decades. Since 2000, even nominal wages are flat against a backdrop of 5% inflation. That trend can't continue indefintely - so it won't.

At this point, the majority is better off with falling prices. That was the trend for hundreds of years. If banks and investors lose out then so be it - that's the risk part of the equation.

aSteve said...

Alice: I think you are being a bit complacent about inflation. If you look at the charts more closely,you will detect a long term deterioration that goes back to 2005

I think your view is too narrow. With a brief hiesis in the 90s, monetary expansion has been a problem going back to the 1980s (and earlier).

Right now, 10% inflation is rather like worrying about hygiene issues re-using guillotine blades, and everybody knows it.

Markbaldy said...

I don't see why Merv has to write any letters to Alistair Darling.
This is pure theatre - going through the motions so that the audience (ie the UK population) can see some accountability, when it is the government that has influenced low interest rates.
I recall Gordon Brown bragging about "low interest rates under New Labour" on many an occasion... which leads me to suspect that int rate decisions were not really at the hand of the BOE at all... independance ?
I don't bloody think so !