Nov 17 2009
Inflation leaps – before the VAT increases hit us
The inflation increase was the largest since August 1990, when our economy was being distorted by following the German currency. RPIX (Retail Price Index without housing) stormed above the growth of the CPI (Consumer Price Index, Mr Brown’s preferred measure), hitting an annual increase of 1.9% compared to 1.3% a month earlier. The CPI itself returned to be the more muted of the two indices, rising from 1.1% to 1.5%. The RPI, still in negative territory thanks to mortgage costs, rose from -1.4% to -0.8%. When VAT and petrol goes up on top of this, expect more upwards momentum in the months ahead.
The inflation came from a wide range of items. Transport and fuels led the pack. Second hand car prices shot up. Air fares, DVDs, computer and other games and telephone charges all rose. So too did meat, vegetables, bread and cereals. It feels as if it is getting dearer out there, and it is. The public sector is still increasing its fees and charges. More rail fare increases are on the way. Commodity prices have been rising rapidly, and that will feed through, especially if the pound weakens again.
The Bank may want a little bit of inflation, and the government may want even more. They should be careful lest their wishes come true on a scale that embarrasses them both. It looks as if we are in for nasty rise in price increases across the turn of the year. That will come as no surprise to readers of this blog, or to students of the very lax monetary policy they have been following for months now.
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
The inflation figures are highly misleading too. If you look at the CPI for instance, last October the index was higher than it otherwise would have been had we not had an exceptional inflation jump in the summer (there’s a certain ‘fuel duty stabiliser’ policy, often ridiculed by the government, that could have prevented that). If you compare this month with the position CPI would have been had things been normal last year then inflation would be around 3%.
If CPI increases in the next few months as it has been the past few, then inflation will be 3.2% in January (108.7 last year v my forecast of 112.2). Of course, with the VAT increase and fuel price rises forecast, we could well see that even higher.
Looks like Merv better get his pen ready.
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Stuart Fairney Reply:
November 18th, 2009 at 9:28 am
If I may
Dear Gordon
What did you expect? And anyway, isn’t this really what you wanted? How else do you imagine you will ever pay these debts? Are you going to turn around to the voters and say “Sorry taxes are now going up on ‘hard-working-families’ and we will have will major spending cuts because the Chinese need their money back” Of course you’re not. Do you really want me to turn off the presses bearing in mind they now fund fully a third of your spending? No, thought not.
Yours
Merv,
(bcc David Cameron)
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All rather inevitable.
I never really saw the lower, more competitive prices that one hopes would benefit the consumer during an economic downturn, and we all knew that taxes would be going up.
The strategy was plain when fuel duty was raised permanently to compensate for the temporary drop in VAT.
If they had proper control over the situation, they would not have scheduled the effective extra rise in fuel duty before having seen how the recession was panning out.
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Will it be back to the 70’s? I still have the kipper ties, but sadly the flares do not fit any more. But I think that all the signs are that it could be a good deal worse than then, because there is far more toxic stuff out there than ever there was in the early 1970’s.
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Mike Stallard Reply:
November 18th, 2009 at 5:51 pm
You mustn’t say the 70s because, as the BBC repeats ad nauseam, the real inflation came in the 80s under “Thatcher”.
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We will look back on this period as a “golden age”, and this is what the present administration wants. Low inflation, rising stock markets, house prices simmering nicely, unemployment not as bad as everybody said it was going to be. Even Grandma’s old ring is worth more than it was last year.
Where’s the problem?
Common sense, history and economics of course tell us a different story. The seeds of an inflationary storm have already been sown, and the next government will need to remove the stimulus against an inflationary backdrop. This means making people redundant from their £25′000 a year jobs to live on £200 a week when their bills are rising faster than benefits can keep pace. The Tory leadership must explain what is going on here, even if they are too shy/PR conscious to explain what they will have to do to stop it. Or maybe they just won’t stop it. What do you think?
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I think that the VAT rise should be delayed until April 2010 and the money be found by not giving yet more to the banks.By keeping VAT at 15% and not giving any extra cash to the bankers you would see a reduction in public borrowing.The reason being that keeping VAT at 15% costs £1 billion a month or so and so extending this tax cut for three months costs £3 billion.Out of £40 billion not given to the banks that is £37 billion left spare to pay down the fiscal deficit.
Raising VAT on New Years Day will be an administrative nightmare. When the retailers will be desperately hoping that we all buy shed loads of VAT rated items in the sales the tax on those items will rise by 2.5% thus depressing demand & fueling inflation.As weak demand & higher inflation are bad things at the best of times it seems mad to worsen things during a recession.
It is mad to impose an extra load of complexity at a time when retail prices are in a state of flux.Big companies like M&S can just absorb the admin cost of thus,shrug their shoulders and move on.For small companies it is yet more complexity at a time when many are suffering recession induced falls in demand for their goods & services, excess red tape and a lack of credit.
Keeping VAT at 15% for a few months thus giving companies time to adjust over a longer time frame would make it easier and it would avoid depressing demand when retailers need sales to be high (i.e. during the sales of January & February).
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Inflation rates, interest rates and exchange rates are like transfer particals in physics. The carry the energy around the system to ensure energy is not lost. In place of energy read wealth for economics.
In the case of the UK the enormous Government debts need to be paid off. We can either do this by cutting spending or by raising taxes. I figure about 20% cuts are needed. BUT if we can’t swallow these cuts then inflation rates, interest rates and exchange rates will find a way of reducing the value of Labours Debt Mountain – BUT they will also reduce our own personal wealth relative to other countries.
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Printing money ALWAYS leads to inflation – and that’s what Gordon was planning in order to drive down the value of the massive debt he has saddled us with. Nevermind the impact it will have on people on low incomes, with savings and those on fixed incomes.
Post election – assuming the Tories win – Labour will be blaming the Conservatives for letting inflation take off and will say it is a repeat of the ’80s – when Mrs Thatcher was dealing with the consequences of the last round of Labour Government failures.
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Yup, VAT is the worst tax of all. Let’s leave the EU and get rid of it.
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Inflation was always going to happen with QE and a government addicted to spending whilst starving non government of capital. However it is unusual to see a total economy awash with devalued cash whilst the productive element doesn’t have enough, I am unsure of the likely full effect except that such a dislocation is bound to have unlooked for results.
The first unlooked for result is that the inflation spiral will kick in before the election.
At a slight tangent one of the problems with assessing economic data in the past ten years is that it has become compromised by spin, timing and blatant omissions ( I suppose the same aplies to all government statistics especially from the Home Office). Does the Tory party have any policy on making statistics production more transparent and independent?
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As you say this is an INCREASE in inflation not just inflation. We have had continuous inflation despite all the poppycock from the BoE and financial commentators about deflation. Many on this blog have predicted that the actions of this government and the BoE would result in rampant inflation and it looks as though it has now started. The government will be delighted to think that the colossal debts they have and continue to incur will be inflated away. The rest of us, particularly those on fixed incomes, can look forward to an impecunious future.
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The ultimate destination for the money-printing train is inflation, pure and simple. And here it comes, right on time.
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The reasons for this are manifest and obvious as you have correctly pointed out for months. If you expand the money supply through QE and price your own (though no-one else’s debt) at zero inflation must follow.
I rather suspect the idea is since inflation devalues debt and the government debts are out of hand, a few of years of 30% inflation will erode them nicely and it might also provide a cover for Euro entry.
An odd phenomena – you still see economists on TV saying that since the economy is still in recession, you won’t see serious inflation, did these people not live through the 1970’s?
By the way, can anyone tell me what the Beeb’s favoured economist Vince Cable now thinks of QE, as I have rather lost track of his latest position ?
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JR: “Transport and fuels led the pack. Second hand car prices shot up.”
Transport costs are heavily dependent on fuel costs.
Fuel costs are directly dependent on Excise duty and VAT which accounts for 90% of the cost of a gallon of fuel.
Government has and is driving up the price of transport.
JR: “Air fares, DVDs, computer and other games and telephone charges all rose. So too did meat, vegetables, bread and cereals.”
Fuel costs comprise a significant proportion of the cost of all these things. They all have to be transported to the point of sale.
On top of that don’t forget Airport tax, which has driven up the cost of air transport. What about the so called ‘green’ taxes?
None of those have driven the price of travel down!
The truth is we are in a period of deflation and the government is using that as a opportunity to raise taxes.
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Rising inflation was inevitable, given the callow amateurishness of the government’s and BoE’s policies. What amazes me is that supposedly respectable economists such as Roger Bootle and Edmund Conway still appear to be in complete denial. These guys were wrong about the ‘benefits’ of a heavily devalued pound, they were wrong about the ‘benefits’ of QE, and they were wrong to worry about deflation. Are they on the government’s payroll, the complete and utter misleading rubbish that they write day after day.
Now here’s the big shock that’s coming next. As inflation continues to rise over the coming 12 months, the BoE will maintain a zero interest rate policy, in spite of its 2% CPI target. They will find various fudges and excuses to do this, such as the current increases in inflation being caused by one-off events such as the VAT change. So savers will find that with inflation at perhaps 5% and rising, and interest rates close to nothing, the government will in effect be stealing 5% of their savings each year.
What can Joe Sixpack do to avoid this? Gold is way overvalued, the FTSE looks set for a fall, locking money up long-term at 5% or so would at least avoid erosion of your savings base, as long as inflation doesn’t go above 5% – and who would bet on that? The only way out of this is to take the exchange rate hit and get into a currency with a future. Australian dollar accounts are paying a reasonable rate of interest, and long-term their economic outlook is far, far brighter than Britistan’s. Even the overvalues Euro is a better haven for your savings, as the Germans will never allow inflation to take off in the casual manner that British authorities seem happy to accept (or even encourage).
Inflation is state-sponsored theft, pure and simple. Only incompetent economists (who seem to be a large majority these days, but they’re not alone, look at the folly of the warmists) truly believe that a positive inflation rate is beneficial. The British government and its central bank wish to steal your savings. Therefore get your savings out of Sterling before they reimpose capital controls.
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APL Reply:
November 18th, 2009 at 12:43 pm
Steve Cox: “What can Joe Sixpack do to avoid this? Gold is way overvalued, ”
If you are expecting rampant inflation then Gold even at these prices should be a good investment, no? You subscribe to the doctrine that gold is a hedge against inflation?
If you had bought gold at the end of 1968 you would have paid £17 per ounce. Today as everyone knows you will pay £681 per oz.
Problem for gold is that is is an asset as such it will have a variable price depending on demand.
Credit is collapsing and gold in increasing in value, a coincidence? I think not.
Steve Cox: “FTSE looks set for a fall, ”
I believe QE is responsible for the rise in the stock market and the rebound in house prices – once again it is hardly surprising that with the government stuffed to the gunnels with property speculators – subsidised by the tax payer – they have done as much as they can to permit them to offload their properties without a significant loss.
Steve Cox: ” locking money up long-term at 5% or so would at least avoid erosion of your savings base, as long as inflation doesn’t go above 5% – and who would bet on that?”
The purpose of QE is two fold. To flood the economy with extra liquidity and encourage people to borrow thus stimulate production.
That is a stupid policy for an economy so dependent on imports as ours is, but it isn’t working anyway.
The banks aren’t lending, in fact they are cutting back on lending. They don’t know who to lend to with out risk of loss.
The second purpose is predicated on the success of the first which is to buy the coming election.
As to interests rates, have you noticed you can’t get a loan for less than 6%? The banks are minting, they pay no attention to the base rate when lending money, but are scrupulous to adhere to the base rate when borrowing themselves.
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Stuart Fairney Reply:
November 18th, 2009 at 1:29 pm
A good and thoughtful post, I might just speculate that as the Americans are on the same path to self-destruction we are on, the dollar will depreciate further and if gold continues to be priced in dollars, then even $1,100 per ounce will look cheap.
Peter Schiff for example has been predicting $4,000 dollars an ounce on various youtube posts. This seems at the pessimistic end, but he was right on the money before.
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The BofE is now politicised and the interest rate is as much a political decision as an economic one. They won’t raise rates before the election because it will scare the marginal Labour voters who are on lower incomes and have mortgages they can’t afford.
Two other things.
First, it’s more dangerous (in the UK) coming out of recession than going into it – because inflation means higher mortgages and in the UK we are over mortgaged. Going into a recessin is eay – just shut your eyes.
Inflation will be imported this time around. Food, fuel, raw materials, large physical goods, outsourced labour etc, will all go up in price. The only thing we can do about it is to supress demand using high interest rates because we can’t control their price.
Our relative global standard of living will fall – either via global inflation or via high interest rates.
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The Bank of England and the American Fed want something quite specific – the reinflation of asset prices, particularly house prices, in order to reduce the toxicity of toxic assets, so as to to improve the balance sheets of banks. Unfortunately, the measures that do this also produce general inflation.
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What staggers me is that about a year ago, the comments on this very blog were all about Zimbabwe and inflation. Our host, however, was talking about deflation.
What he realised and many of us (including me) did not, is how very slowly, blindly and inexorably the State wanders along.
Now the vast dinosaur is waddling complacently into the mire of inflation and there is nothing we can do about it.
BUT Canada, when faced with a similar problem, valiantly cut the State back successfully (20% in five years) and started a very successful growth. We ought to be able to match this, even if we are carrying the unnecessary weight of the EU round our necks.
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The proles will forget – if they ever understood – that all this started under Labour. The Tories will get all of the blame for the hardships to come – a repeat of Thatcher … except there is no Thatcher to rescue us this time.
Throw the election. Let the country go to the dogs under a Labour Govt. (Our fortunes can’t be changed now anyway)
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I think 17.5% in Jan is only the start of it. A 2.5% increase to 20% would raise 5 billion. With debt now going over 100 billion, this is a certainty. I also read on this site http://www.tmf-vat.com that many other EU countries have been quietly raising VAT to cope with government debt. This includes: Spain, Finland, France, the Baltics, Hungary…..it goes on.
What a mess.
David
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VAT will go back to 17.5% on January 1st 2010.
Am I right in remembering that the chancellor put 2p per litre on fuel at the same time to counteract the reduction of VAT on fuel ?
If so, I wonder if the temporary fuel duty increase will remain after VAT returns to 17.5% ?
Somehow, under this government, I think it will.
Could a question be asked of the Tranport Ministry, or the Treasury as to what will happen to this 2p increase.. will it be removed ?
Thanks
David
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