Tuesday, October 12, 2010
Inflation stuck at 3.1% - and softer data
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

The inflation rate remained at 3.1% in September, above the Bank of England's comfort zone, and offering nothing to either side in the great monetray policy debate. There were some big movements in the data, including falling air fares, petrol prices and second-hand car prices, offset by higher food prices and a 6.4% jump in clothing and footwear prices, a record for the month.

The latter, which represents a bigger-than-usual bounceback from the summer price cuts, leaves clothing and footwear prices a modest 0.9% up on a year earlier, though this is in contrast to the falls of recent years. Both retail price inflation and retail price inflation excluding mortgage interest payments (RPIX) slipped from 4.7% to 4.6%.

Overnight, the quarterly British Chambers of Commerce survey and the Royal Institution of Chartered Surveyors and British Retail Consortium monthly surveys were somewhat though not spectacularly softer. The trade deficit narrowed in August from £5 billion to £4.6 billion, though both exports and imports of goods fell on the month. More here.

David Miles, a member of the Bank of England's monetary policy committee (MPC) is thought to be leaning towards more quantitative easing, though his speech offered a vision of the future in which the Bank could be blamed either way.

"UK inflation now sits uncomfortably above the target. But I believe that this tells us rather little about the cyclical position of the economy or where inflation will be in the future. Underlying forces that were created by the financial crisis and that would themselves keep inflation low have been offset by other factors that have kept inflation above target for much of the past year. These factors are well known but it is important not to forget the likely scale of their impact. Around one quarter of the goods that enter the basket for calculating the UK CPI are imported. The 25% depreciation seen since 2007 would – given that imported goods and services account for around a quarter of the consumer price basket – add a bit above 6% to the level of the CPI. Over a three-year-period that would generate 2% a year higher inflation. We have also seen the VAT rate cut and then increased."

He concluded: "It is inconceivable that you can get monetary policy exactly right. After the event we will have a better idea of which way we got things wrong. It is a near certainty that four or five years from now the monetary policy that is set over the next year will, with the benefit of hindsight, look very likely to have been too loose or too tight. Many then will talk about the big mistake the MPC made in late 2010 and the first part of 2011. If we tighten too quickly it will be a story of “myopic MPC learnt nothing from events of 2008”; if growth and inflation look stronger than I now think is the most likely outcome it will be “MPC completely failed to see what was obvious to nearly everyone - that inflation was out of control”. But the only sensible thing to do is to look at all the evidence we have today, and balance the risks."

The speech is here.