Tuesday, 20 January 2009

I expected more

Today's inflation number really should have been a lot lower. With the banking system imploding, and the real economy in freefall, prices should be coming down.

The December number came in at 3.1 percent. It should have been much closer to 2 percent. After all, we did see the 2.5 percent VAT reduction, massive pre-christmas sales, and the collapse in oil prices. Really, I was expecting much more.

So why didn't the inflation rate fall further? I am going to guess that the sterling depreciation is beginning to feed through the supply chain.

12 comments:

Budvar said...

You can have asset deflation of things like houses, cars, shares, rolexs etc but have have ok matbe not hyper just yet, but super duper inflation in things you need like bread potatoes rice meat fish gas and electric which have all gone through the roof in price.

John Pickworth said...

Mmmm strange ain't it?

I noticed last year how the prices of some basic food stuffs rocketed; Warburton's white sliced bread for example hit £1.29 on the back of increasing fuel and grain prices. While the wholesale costs have relaxed a bit since, I notice the shelf prices haven't reduced.

Okay, I know inflation doesn't work that way but if these prices don't fall then there's little to pull against those that are rising due to higher importation costs.

Actually, come to think of it, some of the heaviest discounting in the High Street is on hi-ticket items like cars, TVs, fashions and furniture etc. Stuff that no one is buying anyway. So whatever the headline rate, its not likely to be reflecting what people are experiencing with their wallets or purses.

John Pickworth said...

Oh like minds posting above ;-)

JKA on Economics UK said...

Major increases in the December data were food (11% of the weighting) up by just over 10% and house hold utilities, electricity, gas and other fuels up 37%.

Clothing and footwear were the biggest fallers, clobbered by heavy discounting during the month down 10%.

blooKat said...

JP Morgan UK inflation forecast HERE. Quite bullish.

Mark Wadsworth said...

RPI is now down to 0.9%.

I think food prices have flattened off again, the big jump was about a year ago.

AntiCitizenOne said...

> So why didn't the inflation rate fall further?

Sterling's fall makes imports more expensive and we import a great deal.

Anonymous said...

I am afraid it is inflation we are under (and hyperinflation is coming around summer time), not deflation. Deflation is BS. Let's take my favourite snack: cashews. A year ago I would by a big bag for £2. Then about 4 months ago, I went to get my back automatically. Got home and looked at the price: £3.90! That's inflation mo-fos! Stop treating us like idiots!

sobers said...

I think someoone in the food chain is making a lot of money and it isn't us farmers! Grain prices are now back to about £110/tonne, from £175/180 at the peak. Milk is down too. But I bet you never see the price of bread or milk fall back to anywhere near what is was before farm gate prices rose 18 months ago. Farm gate prices fluctuate wildly, but food prices tend to go one way only. Up quickly in times of commodity price rises, then stable while the commodity price falls. Then repeat.

Is it any surprise that the big food retailers have all announced surprisingly good profit figures, given the economic outlook? Not difficult when all the basic commodity prices have fallen over the last 6 months to a year, and you've kept prices as high if not higher than they were before!

Leslie said...

I thought the discounts would do more to reduce inflation.

cmjb said...

If you go to http://www.statistics.gov.uk/releasecalendar/currentreleases.asp and look at the releases for 20 Jan, you'll see a "Briefing Note" for the Consumer Price Indices - December 2008. This is a 49 page PDF document, so be forewarned. However, while tedious to read, this is the place to go to understand the details of the price indices.

The monthly CPI decrease came from falling prices for clothing and footwear, petrol, car prices, toys, the VAT reduction, and restaurants and hotels.

The monthly RPI decrease came from the fall in mortgage interest, petrol, and the items that caused the CPI to fall.

powerman said...

Here's a hypothesis:-

High-ticket items like plasma TVs have high price elasticity depending on the supply of credit available to buy them.

Things like bread and coffee don't, so are more sensitive to changes in exchange rate than credit availability.