Wednesday, 13 May 2009

The CPI becomes sticky

Why isn't the inflation rate falling? Wasn't the UK supposed to be teetering on the edge of deflation?

Take fuel out of the CPI and all other prices are increasing by 3.5 percent. Almost the entire fall in the headline inflation rate is due to the sudden collapse in oil prices when it went from $147 to just $39.

Unfortunately the price of oil is turning nasty again. It has just crossed the $60 mark. Which means that rather than helping bring the headline inflation rate down, the price of oil will start to push it back up again.

Meanwhile, the Bank of England is printing cash, buying up every piece of government debt that comes onto the the market. Over in Westminister, the Government is about to run up the largest fiscal deficit in peace time. The last time we had a larger deficit, prices were kept under control by rationing.

Give this sorry mess 18-24 months, and the UK will look like a 1970s Banana Republic.


Anonymous said...

deflation is a lie

QG said...

Your concerns about inflation could be used as an argument to buy property or some other asset that might hold value. I don't think it's time to buy now but if inflation shoots up next year and interest rates are held down, what are savers supposed to do?

Alice Cook said...


I have pondered this question. In part, this is what the BoE wants, it is trying to construct safety net for asset prices.

I find the idea of a renewed housing bubble repulsive, but I wouldn't rule it out.


Anonymous said...

Fortunately there are only 12 more months maximum to endure. Less if we are lucky.

sobers said...

I have to agree. We are in denial at the moment, just as we were about house prices 2 years ago. Everything points to a crisis in govt debt funding at some point in the next 2 years, a currency crisis, and a rapid rise in inflation as a result.

Add in all the cash the govt has printed, and borrowed, that currently is being hoarded by the banks, and you have the perfect inflation storm. Loads of cash chasing limited assets/goods, and a falling currency pushing import prices up too.

I say buy property later this year or early next year. If possible borrow the money to do so. In five years time inflation will have made whatever you borrowed look very cheap. Or buy commodities - oil, foods, metals. The Jim Rogers strategy basically.

AntiCitizenOne said...

There might be an "asset" bubble in pound terms, but in terms of a basket of currencies the UK will be FUBAR.

Stevie b. said...

"what are savers supposed to do?"

The problem is that the West has been over the economic hill for at least 10 years. As the West has been and will remain in denial about this, there is no reason why Western currencies should not fall apart one after another(Euro last I'd guess). This may mean they all end up with a similar relative value to each other, but meanwhile essential costs like food and oil will rocket, so I'd be looking at whatever ratio of gold and farmland to your total assets makes you comfortable.

Forget property - unemployment, Western decline on top of a declining mortgage-to-earnings ratio will make it a RELATIVELY bad investment. As I've said before, you cannot prop-up the unproppable-uppable, especially currencies including the we're-the-global-reserve-currency-so-we're-ok $.

electro-kevin said...

Location location location

There must be a better way to speculate than buying property in a soon-to-be third world country.

trimalchio said...

Only twelve months till what? Surely you're not imagining an election will change any of this... are you..?

dearieme said...

More likely we'll be a no-bananas republic.

Yes, we'll have no bananas
We'll have no bananas I say.
No broad beans, no onions
Not old uns, nor young uns,
And no sorts of fruit and say
We'll have no plums or greengages
No salaries nor wages
So yes, we'll have no bananas
We'll have no bananas I say.

Anonymous said...

Give this sorry mess 18-24 months, and the UK will look like a 1970s Banana Republic.It will, except that the UK will still be a stable, functioning democracy with a broad middle class, an honest judiciary, universal health care (universal dental care is advised), advanced infrastructure, highly sophisticated companies, and no bananas.

But if you overlook those items, the UK is just steps away from being Haiti.

Anonymous said...

Anon @04:47, didn't Zimbabwe have alot of these?

I would hardly say the UK has a "functioning" democracy given the way the government treats any dissent and we hardly can get rid of them either but i guess that satisfies "stable" - just like Zimbabwe....

"Highly sophisticated companies"??? Who? World leaders in their field who are british at a push are Glaxo, BP, maybe Vodaphone, really stretching it HSBC.

Universal health care which regularly bankrupts the country.

But apart from that you are spot on.

Anonymous said...

The Americans have a website called "shadowstats" which undoes the obfuscation of their government statistics.

I dearly wish we had something comparable in the UK. None of us really trust the government - it is downright disorienting not having credible stats.

I have considered attempting to gather interested parties to get a UK shadowstats.

Personally though I lack the technical expertise in economics.

electro-kevin said...

Anons at 04.47 & 06.16 - don't forget that Britain is over populated by about 30m.

Dearieme - that was hilarious. I may pinch it if you don't mind.

AC said...

Wake up ! Gold is money. No gold = no money. For the average person it's easy to cover yourself by investing in commodity etfs in a trading ISA or SIPP.

dearieme said...

What ho, e-k. Help yourself, though I hope you'll give credit.