Inflation up ...and down!

The rising price of imported goods - particularly fruit, vegetables and toys - has caused an unexpected rise in one measure of UK inflation. The Consumer Prices Index (CPI) was pushed up to an annual rate of 3.2% in February, from 3% a month earlier. But a sharp fall in mortgage repayments caused the Retail Prices Index (RPI), which includes housing costs, to fall to zero for he first time in 49 years. Economists had predicted that both measures of inflation would fall.

Link to BBC News

Some interesting links on the BBC News site. One explains who the likely winners and losers are from the inflation changes whilst another enables individuals to calcualte their own inflation rate by completing a table of their expenditure, providing a good illustration of how an average rate masks the experiences of individuals.

Are you an inflation winner?
Calculate your inflation rate

The basket of goods used to calculate th einflation index has also been revised. LInk

What type of inflation is the UK experiencing? If the authorities wished o bring it back within the governments target range of 2%, what could they do? Would this be appropriate in the light of the current state of the economy?

UK now 'in deep recession' - economy will shrink by 4% this year

Further confirmation (if any was needed) of the worsening of the UK's economic position. The governor of the Bank of England, Mervyn King, has warned that the UK is "in a deep recession" in 2009 and said rate cuts may no longer work and hinted thta 'unconventional' measure may have to be used. In its latest forecast for economic growth and inflation, the Bank says that the UK economy will decline sharply in the first half of the year. And it says that there is a significant risk that the recession will be even longer and deeper than expected. The Bank forecasts the economy will shrink by 4% from mid-2008 to mid-2009.

Link to BBC News

What do you think Mervyn King meant by 'unconventional' measures?

Big fall in UK inflation

Consumer price inflation fell sharply in December to an annual rate of 3.1% from November's figure of 4.1%. The biggest factor was the cut in VAT from 17.5% to 15%, announced in the pre-Budget report on 24 November, the Office for National Statistics said. But high food, gas and electricity prices prevented the rate from falling as fast as economists had predicted. The headline Retail Prices Index (RPI) measure fell to 0.9% from November's 3% rate, the biggest fall in 28 years.

Link to BBC News

FT Video

UK already in recession - Bank of England

The Bank of England says the UK entered a recession in the middle of 2008 which will continue through 2009. In its quarterly inflation report, the Bank warns that the economic landscape has changed dramatically since August. It now expects inflation to decline to 1% by 2010, below its 2% target, in a dramatic change to its last forecast. This could open the way for further interest rate cuts if the Bank is to maintain inflation at its target rate in two years' time. "We are certainly prepared to cut bank rate again if that becomes necessary," said Mervyn King, the Bank of England's governor.

UK consumers plan to spend 7% less this Christmas than they did last year, a survey from business advisory group Deloitte has suggested. Deloitte warned this festive season may be "one of the toughest in decades" for retailers. The expected fall compares with a 7% rise in spending in 2007. (BBC News)

Inflation up to 4.7% - another letter!

The annual rate of UK inflation rose to 4.7% in August from 4.4% the month before, a higher-than-expected jump. Inflation as measured by the Retail Prices Index (RPI) - often used in pay negotiations - fell to 4.8% from 5%. The biggest contributor to this rise was the increase in energy prices which outweighed a number of prices falls. For the third time the Governor of the Bank of England, Mervyn King, was forced to write a letter to the Chancellor explaining why the inflation target had not been met. The BBC site as a nice video feature looking at the content of the Governor's letter. (Link)

Still concerns about 'stagflation'.

The CBI has become the latest organisation to predict that the UK will fall into recession this year. The business group estimates that the economy will shrink by 0.2% between July and September, and then by a further 0.1% from October to December. Its report follows similar warnings from the European Commission and the British Chambers of Commerce. An economy is generally considered to be in recession after two successive quarters of declining output. (Link)

The Governor of the Bank of England has warned MPs that inflation, now at 4.4%, is set to exceed targets once again. Mervyn King said "it would not be surprising" if he had to write to the chancellor next week explaining why inflation had exceeded targets of 2%. He added all advanced economies were facing "testing times", but he saw no reason why the UK could not cope. However, Mr King also warned there was no quick fix for the current mortgage crisis affecting the economy. (Link to article and Video clip)

How do people experience inflation?

The BBC reports that food prices in UK supermarkets and shops have risen by 8.3% since January. Meat and fish - up 22.9% - registered the biggest price increases for any one category in the survey, with fresh fruit and vegetables up 14.7%. Retail analysts Verdict Research also found price rises of nearly 50% for some individual food items. The figures come amid growing concern about the high cost of food, which is exceeding the official inflation rate. On Wednesday, the British Retail Consortium (BRC) said that food price inflation over the past year amounted to 10% - more than twice the official Consumer Prices Index (CPI) inflation rate of 4.4%. Other research has shown that prices of many other items (e.g. energy) have risen by significantly more than the headline rate of inflation. Link to BBC report

Economy slowing down ... or is it?

The Bank of England had warned the UK was heading for difficult times and it would act to rein in inflation. The Bank of England's governor, Mervyn King, said the UK was facing its "most difficult economic challenge for two decades". (View video of speech) The following day a record level of retail spending in May provided a respite from gloomy economic predictions, but it also fanned fears of higher interest rates. Sales rose by 3.5% during May, the strongest monthly growth since January 1986, statistical office figures show. Shocked analysts said the figures ran contrary to signs of a slowing economy and weak consumer confidence. (Details here)

Mervyn King made it clear that inflation was set to rise whilst house prices would fall. He said the MPC was "prepared to take whatever action is needed" to bring inflation back down to the government's 2% target. The latest inflation figures showed that the rate of consumer price growth had accelerated to 3.3% in May. However, Mr King added that monetary policy alone could not prevent the current effects of rising food and energy prices on living standards. People would have to accept that their pay rises would have to be limited which would affect real take home pay and make life difficult for some.

Inflation 'likely to rise further'

Both official measures of UK inflation rose in May. CPI was up to 3.3% from 3% and RPI to 4.3% form 4.2%. Rising food and energy prices could push UK consumer inflation above 4% this year, the governor of the Bank of England has warned. This month's rise meant that he has had to write the dreaded letter to the Chancellor explaining what measures are being taken to bring inflation under control. In it he says "As things stand, inflation is likely to rise sharply in the second half of the year, to above 4%... (but) there are considerable uncertainties, in both directions, around this, and any such projection is particularly sensitive to changes in domestic gas and electricity prices." British households must learn to live with higher prices and without increased wages, Mervyn King warned. (Link to BBC News) (Link to The Guardian article)

UK households have become increasingly aware of inflation over the past year, and expect it to rise over the coming 12 months, new research suggests ... energy, petrol and food price rises have increased inflation awareness. Inflationary expectations have proved to be significant in accelerating the rate of inflation in the past. (Link to BBC News)

The Bank of England’s Monetary Policy Committee voted eight against one to hold interest rates at 5 per cent this month, but some members were ready to consider an immediate rate rise to contain inflation, minutes of the meeting showed on Wednesday. “If there were a serious threat to medium term inflation expectations then a pre-emptive rise in rates would be appropriate. Delay would only increase the eventual costs of bringing inflation back to target,” the minutes said.

Further evidence of economic slowdown

Numerous reports overthe past few days have confirmed a significant economic slowdown. The Chancellor, Alistair Darling, has said that there is "no doubt" the UK economy is slowing and has warned it will be a "difficult year" ahead. He warned of the dangers of allowing inflation to increase, calling for pay restraint to prevent the development of a wage-price sprial, so familiar to economics students of my generation. He pointed out that fuel and food price increases were hitting consumers. (Link to details)
This follows the warning from the CBI that 'the economy will grow at its slowest pace for 17 years.' The CBI's quarterly economic outlook shows that the employers' body has lowered its forecast for GDP growth in 2009 by 0.4% to 1.3%. The slowdown in consumer spending is set to intensify, says the report, pushing consumption growth down to 0.7% in 2009, the lowest level since 1992. (Link to details of the survey)

An indicator of the economic situation, contruction, was also under the spotlight with the news that the number of new houses being built had slipped to its lowest level since 1945. The biggest reason for this appears to be the inability of potential buyers to obtain mortgages. (Link to article)

OECD highlights inflation worries

The Organisation for Economic Co-operation and Development (OECD) has said inflation remains a danger, as oil prices have shown a sharp increase. "Ministers were concerned about inflationary pressures and indications inflationary expectations may be drifting upwards," the OECD said. They also said attention should be paid to fiscal balances, especially where inflationary pressures remained high. It also believes that the British economy is entering a period of "significant down-swing" that will see it grow even more slowly in 2009 than this year and house prices will fall further.
In its half-yearly economic outlook, the OECD was particularly downbeat about Britain, predicting that the economy would only expand by 1.8% this year. That rate will drop to 1.4% in 2009 - the lowest since 1992, when Britain was in a deep recession, and half the pace of 2007. (Details - click here)

What is the 'real' rate of inflation?

A superb article by John Kay (Full article here) on the differences between the official rate of inflation, as measured by the CPI (currently 3%) and perceptions of inflation. 'There has always been scepticism about official measures of inflation, but the gap between popular perceptions and the government’s statistics has never been so wide.The popular newspapers have sent intrepid reporters down to the shops to discover the truth, by filling a typical shopping basket. The results are “alarming”, “the most savage increase in living costs for a generation”. The Daily Express found an 11½ per cent increase in prices, the Daily Mail put it at 15 per cent.Yet what the Office for National Statistics does is just what the Express and Mail did, except that the ONS does it much more carefully.

As he points out, the CPI is an average and as such 'disguises a range of experiences' and it is the 'most salient prices' that form our perceptions of inflation. 'The price of petrol is highly salient: not only do people buy petrol regularly, but even when they are not buying it, they routinely pass signs that display the price. We are most observant of the prices of goods we buy regularly and often and of the cost of undifferentiated products, such as petrol or milk, for which price comparisons are easier and likely to stick in our minds.' He points out that perception of inflation is not determined by the ONS but by experieince.

Inflation ...all the fault of the MPC?

According to an article in today's FT, 'the increase in consumer prices index inflation since mid-2007 can be largely explained by rising global prices for food and energy. The deeper question, however, is why these have not been offset by slower rises or falls for other products and services, as would be expected if monetary policy had been correctly calibrated to meet the inflation target.' The MPC ' allowed excessively loose monetary conditions to develop between 2005 and 2007. Bank rate was cut inappropriately in 2005 and maintained below its neutral level until 2007. During this period, investors’ risk appetites significantly increased. The result was a prolonged period of buoyant money and credit expansion.' They discussed rapid money and credit growth in 2006 and 2007 but'played down the dangers'. The upshot is that official neglect of monetary warning signals has once again been followed by 'an unexpectedly large rise in inflation although the details of the transmission mechanism differ. In effect, loose domestic monetary conditions have accommodated or even supplemented the inflationary impact of rising global costs.' It is also suggested that there is liitle scope for further interest rate cuts in the near future. Read the article.

Government 'should change inflation target'

Consumers will be "crucified" unless the government changes its inflation target, a leading economist has warned. Peter Spencer from the influential Ernst & Young Item Club is urging ministers to change the 2% inflation target used by the Bank of England. He warned that interest rates would have to stay at 5% if inflation is to be brought down to 2%. He added that keeping interest rates at their current level would hurt hard-pressed households. Professor Spencer said consumers were paying the price for an inflation target that had become unrealistic given the volatility of oil and food prices. He called for the Bank of England's remit to change so it focused on "core inflation", a measure that excludes food and energy prices and is used in the US. Read details here.

David Smith's piece in the Sundaty Times also makes an interesting read, especially the divergence between base rate and other interest rates in the economy, those that have a real impact on economic activity. Link to article. Geoff Riley provides a summary of the key points on the tutor2u blog. Link

Does the CPI reflect the 'real' level of inflation in the economy?

UK unemployment rises by 14,000

UK unemployment rose by 14,000 to 1.61 million in the three months to March, official figures show. The number of people claiming Jobseeker's Allowance climbed by 7,200 to 806,300 last month, the Office for National Statistics (ONS) said. Analysts warned the figures may indicate that global financial problems were hitting the UK and could impact the labour market in coming months. The unemployment rate was unchanged at 5.2% in the three months to March. The figures come amid signs that the UK economy is slowing. At the same time, inflation has picked up, driven by higher food and fuel costs. Read the details here.

The Independent had the headline today 'The spectre of 'stagflation'; a combination of stagnant output and high inflation not seen for decades is set to haunt policy makers for months if not years to come. Click here for the article.

Click for video from BBC News with an anlaysis of the change in Unemployment. The commnetator also makes the point that employment has also increased, with an attempt to explain how this can be the case.

With inflation rising to 3%, how influential will this rise in unemployment be in persuading the MPC to cut rates when it meets next month?

Food prices drive India inflation

Inflation in India has hit a three-year high as a result of spiralling food and energy costs, official figures show. India's wholesale price index, released weekly, hit 7% for the year up to 22 March, the highest since December 2004. The government has been taking steps to control prices, banning exports of non-basmati rice and scrapping import duties on cooking oils and maize.
Economists said the data could trigger a rise in interest rates this month, earlier than many had expected. India's Economic Times says the government is considering a price ceiling on commodities if all other measures fail to bring down inflation - a law last used in the 1970s.

http://news.bbc.co.uk/1/hi/business/7330045.stm

Try to evaluate the methods being used by the Indian government in an attenpt to curb the rise in food prices.

Rising Prices

Three items on rising prices the BBC website today. The following video focuses on risng wheat prices and their effects on those in farming and consumers:
http://news.bbc.co.uk/media/avdb/news/uk/video/158000/bb/158238_16x9_bb.asx?ad=1&ct=50
Oil prices continue to rise, attributed to the falling value of the US dollar against the Japanese yen and the euro and failure of OPEC to increase production despite increases in demand from China. Geof Riley provides a good analysis of the situation on tutor2u.
http://news.bbc.co.uk/1/hi/business/7289070.stm
http://www.tutor2u.net/blog/index.php/economics/comments/110-for-diesel-and-further-rises-to-come/
China's inflation hit 8.7% in February, the highest rate in over 11 years. Soaring food prices were driving inflation, up 23.3% in February against the previous year.
http://news.bbc.co.uk/1/hi/business/7288940.stm

Australia raises interest rates

Whilst interest rates in the USA have been slashed and pressure grows for cuts in the UK, Australia has raised interest rates to an 11-year high of 7%, as part of efforts to control rising inflation. Australia's resource-rich economy has continued to expand due to a sustained rally in commodity prices. The Reserve Bank of Australia has raised the cost of borrowing 11 times since 2002. "Having both the international and domestic information available, the board concluded that a tighter monetary policy stance was needed now," said Glenn Stevens, the bank's governor. Inflation is running at an annual rate of 3.6%, above the bank's comfort zone of 2% to 3%.

http://news.bbc.co.uk/1/hi/business/7228153.stm