Dec 15 2009
Inflation soars – as predicted
UK inflation jumped by a massive 1.1% on the RPI to 0.3%, and leapt up to 2.7% on RPIX. The government’s preferred measure, the CPI, rose to 1.9% in November. As we feared, inflation is on a charge, and will continue so into the New Year as VAT goes up. The price increases were widely spread across the board, despite efforts to brief that it was mainly transport costs, as if they don’t count.
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
Wait until the economy really starts to recover, then you will see some real inflation.
Gordon knows what he is doing, he is trying to get out just as it all collapses.
Blair was even better, he got out before it started to happen.
Then it could be your problem.
Again.
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A lot of things seem to be going up in price. Either that or they reduce packet sizes without a price reduction – or they reduce quality.
Inflation has been Nu Lab’s biggest secret – why else did MPs’ expenses need to be increased.
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The pollution that is labour mis-management has yet to be felt but felt it is going to be. They have moved heaven and earth to keep the pain hidden prior to the election. It’s looking as though all their spin, BBC control and even that (word left out) man Campbell back in the cave, is not able to hold back the tidal wave of debt that is to engulf The UK. Shares in wheelbarrows are set to rise. All made in China, of course.
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Perhaps I’m being overly pedantic, but it’s very easy to lose track of which percentage means what in figures like this.
Given some variable x.
If the change in that variable over a month is a 1% increase does that mean the new value is
– x * 1.01 (which is 12% p.a. uncompounded or 12.7% p.a. compounded)
– x * 1.000833 (one month’s equivalent of 1% p.a. uncompounded)
– x * 1.000829 (one month’s equivalent of 1% p.a. compounded)
If the variable x is a percentage (as it is for inflation), does a 1% increase mean
– 1% relative (1% to 1.5% would be a 50% increase)
– 1% absolute (1% to 1.5% would be a 0.5% increase)
– per annum compound
– per annum uncompounded
– per month
The ONS (or whoever prepares these figures), filled with mathematicians should know that ambiguity is not acceptable in mathematics. It should be clear from the reported figures, and it isn’t.
All of these different possibilities are equally reasonable when told that inflation has gone up by 1%, but without knowing which, I have no way to know if that means prices will increase by 12% next year, or 1%?
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John Moss Reply:
December 15th, 2009 at 1:51 pm
These are annual inflation figures for the 12 months to last month.
The fuel increase is significant because it was around this time in 2008 that oil prices fell rapidly so that is “unwinding” Next month will be much worse becasue they fell further in December last year.
That said, if you pump £200bn of funny money in to the economy, you will create inflation. Chickens, Home, Roost!
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Does anyone believe e.g. the 1.9% CPI tractor statistic – so conveniently close to the BoE’s 2% target rate? A little bit of extra hedonic regression here and there soon fixes the answer, I’m sure. One of the real battles to be fought will be to ensure some honesty in statistics again. If we don’t know where we are, we can’t begin to know what we need to do to proceed in the right direction.
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Totally agreed.
Inflation will rise dramatically as the new global economy gets back into its stride.
This time it will be largely imported inflation as the cost of metal, wood, iron, minerals, etc, ect go up in price.
Because our exchange rate is so poor then inflation will be magnified.
Because inflation will be imported will will have very little control over it.
So what does this mean for interest rates. I’m in 2 minds. Our economy was in a rare period when interest rates had an effect on inflation in the past 20 years, interest rates will now prove a blunt instrument to control external forces.
I think we need to think again about interest rates and treat them as an inverse controller of investment and growth rather than a supressor of demand.
But that wont happen, interest rates will rise and rise and rise and still not control inflation.
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So what will it be by May2010 for the Election, 5 or 6%
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alan jutson Reply:
December 15th, 2009 at 5:28 pm
John
No March, before the April tax increases take place.
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Thank you John for your candid and honest analysis. Too often when reading political blogs one is always aware of political motivation and spin. I feel however that you are a true champion of the common man telling things as they really are. Oh that we had more straight forward honest politicians as you appear to be! Do you follow Nadeem Walayat at http://www.marketoracle.com or the reports from www. marketsceptics.com? hidden news that needs to find it’s way into the mainstream, I would recommend them to you. Some of us, the few perhaps, realise what is happening to the UK and we need a champion, I sincerely hope that history will look back on you as man of integrity and honesty, which, to me at least, you appear to be.
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I think inflation is a little like falling off a building.
At first you only go at 32ft/sec/sec……..
Or perhaps it is a bit like sex……
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I believe I commented on this last month, but I shall again here. CPI inflation is currently running at about 3%, going on the slope of the regression line through the current trend in the CPI index. The only reason the year-on-year figure is as low 1.9% is the fuel price inflation we experienced last year.
Forecasting on the current trend, CPI inflation will be ~2.5% next month and ~3.5% in January and should then settle down to it’s true level. The really scary thing is people talk of inflation being 1-2% when it is nowhere near that. When the full inflationary effects of QE really start to hit we could have all sorts of troubles.
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It looks like we here in the US will be following shortly the battle with the inflation dragon. All the printing of money out of thin air and the encouragement by the our gov to the citizens to spend and get themselves further into debt is not going to end well.
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I’ll be spending 31st December repricing things on my shop for the new VAT rate. I can’t even revert quickly to the old prices because since the fall of sterling prices for all imported items have gone up by at least 25%, some of mine have gone up by 50%. So I’m rather surprised inflation is as low as they say.
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Inflation shooting up is certainly no surprise to contributors to this blog. When is the BoE going to reverse its money printing, after all they can’t still argue that they fear deflation? Isn’t the truth that printing this £200,000,000,000 of funny money was never anything to do with deflation? It was all about buying government debt and laying the foundations for hyper inflation to eventually magic away the debt whilst ruining the majority of us in the process.
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We are surely in a mess as a country and yet appear to be sleepwalking into disaster. And who will suffer – the people who have modest savings and have worked hard to be self-sufficient. What really worries me is that we are speaking to ourselves here. What is the mechanism to communicate so you get back in power to help us regain our great country. State the reality and you don’t get the votes from the majority who don’t think it is as bad as it is. Skirt round the issues and you don’t have a mandate for real change. Is there a silent majority who don’t express their views in public or in polls, but in the sanctity of the ballot box, will deliver the landslide.
If Labour win (God help us) the change might happen under the direction of the IMF. If you get in (Yippee) you’ll have a look at the books, put a holding positon in to stabilise the economy, but then will have to go back to the country 18 months later for that real mandate for change having spelt out over 12 months the real story of Labour’s catastrophic period in power.
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Stagflation, anyone? The genie is out. We now face a ten year war to get things under reasonable control.
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The pound is falling and we’re printing money, how can anyone be surprised that inflation is rising? Cause and effect.
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The interesting thing is that the Govenor of the Bank of England professes to believe that inflation will peak at 3%, then go down.
(1) Does he really believe that, or does he just want to reinflate asset prices in order to help RBS and Lloyds/HBOS out of a hole?
(2) If he does believe it, why does he?
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Stuart Fairney Reply:
December 16th, 2009 at 1:52 pm
I’ll have as large a wager as anyone cares to bet, that inflation will exceed 3% even on the official figures let alone in reality.
A large wager that it doubles that figure
A medium wager that it goes double figures
And a small wager that it goes above 20%
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Stuart Fairney Reply:
December 16th, 2009 at 1:53 pm
Guido noted yesterday that UK gilts trade at AA price levels not AAA levels so in effect, we are downgraded in all but name.
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You worry far too much John, Mervyn and co have an advanced computer model which they use to keep on top of this – it’s called ‘monetary policy balloon’ and you can play it here:
http://www.bankofengland.co.uk/education/inflation/balloon/index.htm
Have a few games yourself, you’ll soon get the hang of things.
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Sally C. Reply:
December 16th, 2009 at 9:17 pm
I don’t know whether to laugh or to cry! It clearly is just a game to the Bof E, with the promise of a fat pension pot at the end of it, just like Merv’s – £5 million and counting!!
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The options for UK’s financial management are already limited. Now inflation has started its run they will be even more constrained whoever wins power.
Will the UK be down rated by the credit agencies?
What will be the market appetite for public debt?
Will the government sector continue to milk the banks and starve the private sector of credit?
Will Sterling devalue further and feed the inflationary spiral?
If Brown/Labour retains power how soon before an IMF bail out is required?
All gloom I fear and everything will be put off until after the election.
The one fun item will be to watch the NU Labour rats deserting Browns sinking ship in the next 3 months or so.
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I am 65 years old with a long memory of prevous Labour governments. They always mess the economy up and i feel i am living back in the 70,s with unions (mad destroyers of the economy) and inflation (mad destroyers of wealth)
Now waiting for power cuts and the three day week.
Hard times ahead.
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The political cycle seems thus: vote yourselves a long holiday under Labour, enjoy the beer and skittles till the cash runs out, then back to work under the nasty Conservatives to work off the hangover and the debt. Then – wa-hey! – more beer and skittles! It may be hard to avoid when one party’s feckless and the other isn’t, but the Tories really should show more political cunning than to permit themselves to be put in the position of always doing the dirty work.
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You opposed joining the euro, and this is one of the consequences.
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Sebastian Weetabix Reply:
December 16th, 2009 at 11:04 pm
If we’d been in the Euro as you Euro-federasts desire we would have suffered a much worse boom with interest rates even lower than they were (& they were already too low under BofE mis-management) and we would have suffered an even worse bust as we wouldn’t even have been able to allow our currency to devalue. If you can explain how being in the Euro would have a) prevented the present crisis or b) would ameliorate it, I would love to hear it.
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Alan Reply:
December 17th, 2009 at 8:35 am
Being in the euro wouldn’t have prevented the present crisis; that was a failure of bankers and of regulators. Keeping sterling didn’t help much either. Actually, on second thought, if we had been in the euro our regulators would have had closer contact with German regulators who might have had some influence on them, but I won’t press that point.
Being in the euro would have ameliorated the present crisis for those who have savings; the savings would have retained their value. It would have rewarded prudence instead of imprudence and so encouraged people to be prudent rather than reckless in the future. It would have made clear how much poorer people are; devaluing the pound has concealed the impact of our losses from most people unless they go abroad (and until the inflation that Mr Redwood expects takes effect). That would make it more difficult for our politicians to conceal the impact of their failures of regulation and more difficult for bankers to continue with reckless investment. In short a stable currency would reward those who have behaved prudently and expose those who have behaved recklessly. Instead sterling has punished some of those who were prudent and allowed some of those who were reckless to survive and to continue their reckless behaviour.
Devaluation has allowed our exporting industries to continue employing people at what are effectively lower wages. I accept that is an apparent advantage for those of us with shares in such industries, and it has kept people in employment. In Ireland and similar countries people have had to accept lower wages and unemployment and has caused their industry to struggle. In the long term though I suspect those coountries will reconstruct their industry more effectively than we will ours, because they are forced by the constant value of the euro to confront reality. We are living in a dream world where we have not noticeably become poorer. But we will eventually have to wake up and face the reality that once again our currency has fallen in value because our economy is inefficient.
It is not central banks that set the interest rates that industry and individuals pay; that is set by banks and building societies, overseen (hopefuly) by regulators. The low interest rates on loans (in euros and pounds) were banks taking risks. We have bailed them out of the result of those risks. They will do it again.
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[...] Economics, John Redwood, Monetary policy, output gaps, Quantitative Easing. Leave a Comment In his analysis of recent inflation figures. His ditto-heads, below, all expect to see massive price hikes and [...]
stagflation coming, perhaps (?)
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[...] In the last year the Bank of England has pumped £200bn of money into the economy. They have reduced interest rates to 0.5%, a record low in over three centuries. Although nominally independent, are very much in line with Government policy, and would have been leaned on heavily if they had disagreed. Sound money has gone. In so far as it existed since 2001, it was despite of deficit-funded spending boom. The risks taken with future inflation are huge, and prices are already rising. [...]