Tuesday, January 16, 2007
Black day for inflation
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

Mervyn King has got away without writing a letter, but only just. CPI inflation rose to 3% in December, a "record" high, from 2.7% in November. Retail price inflation jumped to 4.4%, from 3.9%. The significance of this was not just that inflation on this measure has doubled in a year, from just 2.2% in December 2005, but that it is at it highest since December 1991. This is before Britain's new monetary arrangements came into force after the ERM exit of September 1992.

Oh, and if the inflation target hadn't been changed, a letter would have had to be written. RPIX inflation (retail prices excluding mortgage interest payments) rose to 3.8%, from 3.4%. A rate of 3.6% would have been enough to trigger a letter. The Bank can partly blame Gordon Brown's petrol duty hike but the figures, all round, are poor. Details here.


David, do you think CPI could creep up above 3.0 in January with rail fare rises etc, or are those changes included in December CPI?

Posted by: Josh at January 16, 2007 12:26 PM

Rail fares will be in the January figures, out in a month's time, as will be the last of the domestic energy price rises. Petrol will be lower, but otherwise it depends on the extent of January discounting. It will be a close-run thing.

Posted by: David Smith at January 16, 2007 12:50 PM

Hmmm yes, I wonder what the exact figure was. 3.049999% ?? Sorry.... can be too cynical sometimes!

The thing I find disturbing is just how fast inflation is growing, even whilst sterling is rapidly strengthening! What happens when the Forex traders find a new toy to play with, and the pound tanks? David, were the pound to lose say 10% (against major rivals) over the next 12 months, do you know roughly what this would equate to in terms of impact on the CPI?

Posted by: Yogi at January 16, 2007 12:59 PM

2.970% actually, as can be derived from the release (104.0 latest, 101.0 last year).

Posted by: Paul Bivand at January 16, 2007 03:24 PM

Just looking at the November '05 MPC inflation report Chart 5.3 :


Today's 3.0% CPI is well above the fan chart, not even in one of the 20 Bands. In fact it looks 0.4% above the most optimistic band. So what is the reason behind their (and I guess everyone elses) miscalculations? It's not as if we've had war or catastrophy and I don't remember any particular economic earthquakes in this period.

Please enlighten me !

Posted by: Jasper White at January 16, 2007 05:02 PM

I still find it hard to understand how the inflation figure is still this low. (Still less than 3% according to Yogi above)

The majority of people I talk to comment how fixed monthly outgoings continue to rise at well above the inflation rates, and this has been the perception over the previous 3 - 5 years.
Have a go at the Personal Inflation Calculator on the national statistics web site :-http://www.statistics.gov.uk/PIC/index.html

To be living the lifestyle that meets this inflation figure I think we need to have a job within walking distance so that the amount spent on commuting is reduced to nothing, at all other times be sitting on our bottoms at home - and your in a fortunate position where you have already paid all your mortgage re-payments.

Posted by: Shaun at January 16, 2007 05:21 PM

For several years now, deflation in imported goods has countered relatively high domestic inflation largely caused by Gordon Brown shovelling money (much of it borrowed) into the public sector. This money spills out into the private sector due to spending by public sector employees and organisations, thus raising wider inflation. This is despite the fact that high inflation in the public sector isn't reflected directly in the CPI or RPI, as public sector services are not paid for at the point of use (hence, for example, the huge rise in the cost of schools only has a small weighting in the CPI as it only includes the cost of private schools).

Now the cost of imported goods is now no longer deflating in the same way, and is rising in the case of oil, so the inflation figures are increasing. Note that the only tool to counter this is interest rates, which squeeze private industry (especially that which has to compete internationally) but which has no direct impact on the public sector.

Posted by: HJ at January 17, 2007 08:58 AM

Apologies for slow response - internet problems. A couple of points:

1. What if sterling fell? The old rule of thumb was that in an open economy like the UK, pass-through occurred quite quickly. So a 4% fall in sterling would produce something like a 1% rise in prices. Those relationships have broken down in recent years - the post-ERM fall in sterling did not have a huge inflationary impact, perhaps because of spare capacity, perhaps the loss of pricing power. It might be different now.

2. Why did the Bank get it wrong? It may not have anticipated the pre-budget report increase in petrol duties, and it may have thought that after the very low October inflation figures it had been worrying too much about the tuition fees' effect. There were also some unusual elements, notably a big December increase in furniture prices - presumably to establish a higher base for January price cuts.

3. Point taken on the public sector, though this morning's average earnings figures show the public sector coming in lower (3.2%) than the average (4.1%).

Posted by: David Smith at January 17, 2007 10:09 AM


Does anyone believe public sector pay figures?

I read the other day that the government wants to keep NHS pay rises at 1.5%. However, re-grading exercises (Agenda for Change, etc.) means that this will, apparently, equate to a 4.5% increase on average.

And what about the ever increasing costs of public sector pensions which isn't included in pay figures?

And remember, GPs aren't counted in the public sector even though that's where they get all their money from...

And the public sector is still recruiting like topsy - at very generous looking salaries.

Posted by: HJ at January 17, 2007 10:57 AM

Dia Duit David

How about M4 money supply? UK M4 money supply is growing at over 14% - incredible. Why are so many British commentators ignoring M4 and its inflationary impact?

Dave Shaugnessy
Dun Dealgan, Eire

Posted by: David Shaugnessy at January 18, 2007 10:03 AM

I don't think they are, here's a note on thiis subject I posted on the discussion forum yesterday:

"The rise in M4 has been extensively debated, including on this site. Is the rise in M4 caused by a surge in consumer borrowing/mortgage lending? No, that has shown no acceleration. What it is caused by is a sharp rise in lending to other financial institutions. That's partly caused by private equity and hedge fund activity but may also reflect some technical distortions. As you will know if you read the site, several members of the shadow MPC are keen followers of M4 and believe in its predictive power. But the OECD has just published some research saying its links to general inflation have broken down in recent years:

Posted by: David Smith at January 18, 2007 10:12 AM