Tuesday, June 12, 2007
Inflation's down, but King's hawkish
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

All measures of inflation dropped last month, largely thanks to falling utility prices, CPI inflation falling from 2.8% to 2.5%, RPI from 4.5% to 4.3% and RPIX from 3.6% to 3.3%. The figures were marginally better (lower) than the City had expected. Further details here.

But Mervyn King, in a speech in Wales, warned that further interest rates will be on the cards if there is evidence firms are exerting pricing power and if monetary growth remains elevated. The speech, widely interpreted as hawkish, is available here. One question is whether, as before, King is using verbal warnings to try to reduce the need for action by the Bank.


Everyone knows that Energy has suddenly been weighed more by the BOE, from it being weighed less as for CPI as it surged. This was signalled by Racheal Lomax as the main reason to expect a falling inflation measure.
Yet however much they fudge the inflation measure, to boost the economic activity and borrowing by the city, real inflatioary pressures are busting through.

Posted by: J Law at June 12, 2007 08:02 PM

Dear David,
The Governor refers to M4 again.
He points out that annual M4 growth runs at 14%. Everything else equal, my calculations suggest that a 1 percentage point increase in annual M4 money supply (i.e. from 14% to 15%) in the next quarter for instance, will increase CPI inflation by a negligible amount of 0.09 percentage points from 2.5% to 2.59%. If another letter of explanation is to be written, we need to blame it on other factors before pointing a finger to M4.

Posted by: Costas Milas at June 12, 2007 08:53 PM

Thanks, though monetarists would argue that the lags are a bit longer than that.

I have to say I just don't understand the earlier point about the Bank of England, the CPI and energy.

Posted by: David Smith at June 12, 2007 09:40 PM

Dear David,
Fair point indeed. But as the Governor argued in his speech (The MPC ten years on), inflation is less persistent in the era of operational independence.

Posted by: Costas Milas at June 12, 2007 10:13 PM

March 2007
"Just as energy price increases have boosted inflation over the recent past, it now seems likely that energy price falls are going to reduce it possibly quite sharply over the year ahead," she said.

"Indeed, we expect inflation to fall below the target by the end of 2007."

Markets are pricing in another quarter point interest rate rise in the next few months but Lomax's comments did little to suggest that she was ready to tighten policy again."

"the weighting given over to gas and electricity bills in the CPI have not risen by the same degree. The breakdown of the official "basket" of goods in the inflation measure shows what we spend on gas bills is up by 17pc and our spending on electricity is up by 7pc since 2003. But, the ONS's own numbers show the cost of these bills has risen by 64pc and 45pc respectively in the same period."

It appears the ONS underweighted energy costs to 10% even as as they rose by 50% combined, and is now overweighting them as they stand a good chance of falling - thus lowering the inflation measure.

Not exactly a fair basis on which to make moneytary policy.

Posted by: J Law at June 13, 2007 01:25 AM

From reading the speech - he didn't sound so hawkish to me.

He indicated that he expected wages to stay low, and the level of tightening he would have to use too also be low.

Posted by: J Law at June 13, 2007 01:28 AM

Hi J Law

This is poor journalism, yet again (Edmund Conway, yet again) . They are comparing weightings to prices.

The price of Gas and electricty have risen by that amount, but we are also earning more. Therefore the wieghtings (% of income used to pay for the goods), wouldn't rise as fast. To keep the same wieghting prices would have to rise as fast as earnings, If they stayed the same, then the weighting would fall.

Also, because of the price rises we tend to use less domestic energy. This would effect the wieghting.

The reason the weighting increased this year, is because last year prices rose by about 25%, which was greater than earnings, and so we spend more of or income on domestic energy.

Posted by: kingofnowhereiii at June 13, 2007 08:38 AM

Yes, I have to agree with that. A straightforward misunderstanding of statistics.

Posted by: David Smith at June 13, 2007 10:21 AM
Post a comment

Remember personal info?