Tide turning or a statistical quirk as inflation falls sharply

Inflation is on the way down although the sharp drop this morning may have quite a bit to do with the fact that last January's hike in VAT is now out of the system.

The consumer price index(CPI) fell to 3.6 per cent from last month's 4.2 per cent according to figures out this morning from the Office of National Statistics. RPI annual inflation which includes Mortgage interest payments was 3.9 per cent in January, down from 4.8 per cent in December.

According to the ONS, The largest downward pressures to this change came from fuels & lubricants, products bought in restaurants & cafes, tobacco, vehicle maintenance & repair, the purchase of new vehicles and alcoholic beverages.

Annual inflation has now fallen by 1.2 percentage points since November 2011; the only time there has been a larger fall over a period of two consecutive months was between October and December 2008.

The rate still remains well above the Bank of England's rate of 2 per cent but yesterday's forecast from the CBI suggested that the rate will be a lot nearer to the target by the end of the year

Inflation falls but bad news on fuel prices

Some good economic news for the government this morning.

Inflation is falling from its September peak with the consumer prices index (CPI) dropping to 4.8 per cent in November in what is being predicted as the start of a protracted downward slide.

Food, petrol, clothing and furniture, household equipment, and maintenance were all sighted as reasons for the fall with the broader retail prices index (RPI) falling to 5.2 per cent in November, from 5.4 per cent in October.

However some bad news from the statistics office when it said that prices of electricity, gas and other fuels rose by 20.9 per cent in November,that is the fastest pace since February 2009.

Inflation is expected to continue to fall into the new year as the affect of January’s rise in the rate of VAT to 20 per cent falls out of the figures.

Inflation starts to move in the right direction as food prices fall

The latest inflation figures are out this morning and as most pundits predicted,there has been a slight fall.

Inflation for October stood at 5 percent lending support to Bank of England predictions that it has probably peaked and will fall sharply next year.

The fall of 0.2 per cent was driven by lower food, air transport and petrol inflation.

Food prices fell 0.9 percent,their sharpest drop for the month of October since 1996.

Upward pressures on inflation came from utility prices, which rose at their fastest annual rate since February 2009. Clothing prices also rose.

Responding to the figures,Owen Smith MP, Labour's Shadow Treasury Minister, said

"Families and pensioners are really feeling the squeeze because the VAT rise and the Government’s failure to act on soaring energy prices are pushing up inflation. With Britain now having the highest inflation of any EU country except Estonia, it’s time out of touch Ministers started taking some responsibility and took action now.

Graeme Leach, Chief Economist at the Institute of Directors said:

"Hopefully inflation has now peaked and it's downhill from here on. There are no guarantees in this business, but a combination of the deteriorating economy and fading energy and VAT effects, suggests high street inflation is now on a downward path.

Out of control? New highs for inflation

The latest inflation figures are just out and will not make pleasant reading for the government.

The measure of CPI puts the rate in September up to 5.2 per cent that's 0.7 per cent up on the previous month and as September's consumer prices index (CPI) will be used to determine next April's rise in the basic state pension and other benefits will further undermine the government's attempts to reduce spending.

Meanwhile RPI annual inflation stands at 5.6 per cent in September 2011, the highest it has been for over 20 years. The last time RPI annual inflation was higher was in June 1991 when it stood at 5.8 per cent

The blame is being put firmly on the costs of energy....more soon

Inflation-should we be worried?

It's due to the return of 17.5 per cent Vat,a rise in petrol prices and a weak pound pushing up the cost of imports,that's if you believe the Governor of the Bank of England.

Or this is a worrying trend and the country could be returning to the dreaded 70's phenomena of stagflation,that's low growth and high inflation.

Today's inflation figures at 3.5 per cent forced an exchange of letters between BoE governor Mervyn King and Chancellor Alistair Darling.

According to the shadow chief secretary to the treasury,Philip Hammond "the figures will be worrying news for millions of families facing falling real incomes.

Mervyn King though appears not to be worried believing that the "blip" will return to normal by early summer.

The only good news is that inflation will help to reduce the fiscal deficit and will help those who now hold negative equities on houses.

Inflationary worries?

Inflation reached a record nine month high in December prompting fears that interest rates might rise sooner than expected.

At 2.9 per cent year on year it is importantto remember that one year ago Vat was cut but there does seem to have been attempts by retailers to capitalise on higher demand.

It must also be remembered that 12 months ago,oil prices were at record lows as the world economy plunged to new depths.

So should we be worried?

Many analysts are still upbeat on the chances of inflation eventually coming back to target.However today's news saw gilt and interest rate futures plunging as markets bet the Bank of England may have to start tightening monetary policy sooner than planned.

Good news for the people of Zimbabwe

Maybe Robert Mugabe isn't a great fan of the West but it appears that a Western countries currency may have finally halted the raging inflation in the country.

From 231,000,000 per cent back in October,the latest figures are showing minus 3.1 per cent in February as a result of the dollarisation of the economy.

What that means is that besides both the American Dollars and the South African Rand now being accepted in the shops,many government salaries are now paid in dollars.

The result is that for the first time,prices are now staying at the same level for days on end whereas before shopkeepers were having to recalculate at least twice a day.

The policy comes on the back of the power sharing agreement between Mugabe and Morgan Tsvangirai.

Last week Finance Minister Tendai Biti said the Zimbabwe dollar had essentially died. He also predicted single-digit inflation by year-end.

Why the RPI will widen the Gulf between Darling and Brown

Andrew Neil has an interesting perspective on the inflation figures.

Writing on the Spectator Coffee House,he argues the following

The political fallout from this morning's surprise figures is clear: the Chancellor's attempts, with the backing of the Treasury, to see off Gordon Brown's pressure for yet more fiscal stimulus in his April 22 budget have been strengthened. Yesterday the Chancellor could point to the support of the head of the European Central Bank, who came out against further stimulus, as have the President of France and the Chancellor of Germany. Last night the boss of the IMF was also sniffy about another boost. Now the Chancellor can point to an inflation rate over 50 percent above the government's official target as another reason why he shouldn't take any more risks with the economy.

The dangers of falling exchange rates

The CPI measure of inflation's rise to 3.2 per cent is an early warning of the dangers that a falling exchange rate can have in recessionary times.

Whilst the RPI measure that includes property prices and mortgages is =now officially at nil pder cent,the consumer index is driven higher by the increased cost of imported goods as sterling declines.

Thus Mervyn King will now once again be forced to write to the Chancellor to explain why inflation is above the 2 per cent rate.

More bad news on the economy as unemployment starts to move

On the back of yesterday's inflation figures comes unexpected bad news on employment today.

Many commentators had almost rejoiced at the fact that unemployment had not yet represented the general doom and gloom in the economy but the rise of 60,000 over the three month period to June shows that now it is catching up.That takes the figures to 5.4% and the biggest jump since 1992.Total unemployment now stands at 1.67m

The number of vacancies also fell in the period down 47,000 to 634,000,although the number of people in work has actually rise bu 20,000 in the same period

The Bank of England meanwhile have slashed its forecasts on growth in the economy.It is forecasting 0.1% increase in the first quarter of next year having previously put the figure at 1% and warns that inflation may hit 5% in the next few months

According to BBC online

Governor Mervyn King explained that the near-term outlook for inflation has "deteriorated since May", due to the fall in energy prices. But he stressed that there are still inflation risks from wage growth, forcing the Bank's monetary policy committee to continue treading a balancing line between the rising cost of living and falling economic growth.

"It may still just be summer but there is a feeling of chill in the economic air. The British economy is going through a difficult and painful adjustment due to higher energy and commodity prices and in banking, credit and housing markets. This adjustment to our economy cannot be avoided and as a result, inflation is rising and growth is slowing," King said.

IMF warning leaves no room for manoeuvre

The IMF's warning to the country this morning shows what little room for manoeuvre the monetary policy committee has for altering the level of interest rates this morning.

It has reduced its growth forecasts to 1.4% this year and 1.15 for next year and warns that inflation could well tip 5%

"So far in 2008, evidence points to a sharp slowing in activity alongside high inflation "Second-quarter growth was weak, forward-looking indicators are gloomy, sterling money market spreads remain elevated, unemployment has edged up and house prices are falling rapidly."

On top of that it warned that the government was in danger of losing credibility if it made a too-drastic revision of the fiscal rules.There have been rumours of it moving the goal posts to breach the magical 40% of GDP figure

Inflation past the 2m mark in Zimbabwe

Never mind our inflation rate.

The rate in Zimbabwe is now 2,200,000 %

Quite a jump from the last official rate which was back in February then recorded at 165,000%

The main cause of this hyper inflation is the government's continued printing of money to pay civil servants,government oficials and the army.This was intensified during the recent election campaign as the regime of Robert Mugabe needed the support of the army.

The regime refutes the explanation pinning the cause on the economic sanctions imposed on the country.It has introduced a system of price controls on business but these have had a negative effect,simply being shortages of supply as business cannot pass on the rising costs of production.

Shortages = rising inflation

On the way up and up

Today's inflation figures make stark reading.The government's official CPI measurte is at 3,8% up 0.5% from last month.
The expected figure was 3.6% and this will mean that the forseen target of 4% is going to be broken a lot quicker than the MPC thought.

National Statistics tell us that

The average price of petrol increased by 5.3 pence per litre between May and June this year, to stand at 117.6 pence, compared with a rise of 1.3 pence over the same period last year. There was a small effect from air transport where prices rose by more than last year

and

The largest upward pressure came from food and non-alcoholic beverages. There were also large effects from meat, fruit and bread and cereals.

Both of which will immediately hit the pocket of the downtroden consumer.

The RPI which includes housing costs now stands at 4.6%,up 0.3% from May.

Fraser Nelson over at Coffee House reminds us that

one of the biggest factors behind this is sterling’s loss of value – 13 percent against a trade-weighted index - which is of the same magnitude as on Black Wednesday. When your currency crashes like that, of course, you’ll notice it at the supermarket checkout.

Meanwhile the government continues to pump out the same old story.The Chancellor tells the BBC that

the UK economy was fundamentally strong, as long as inflationary pay rises were resisted in the economy.

Inflation.On the way up?

All the talk this morning is of inflation with the figures out shortly,everyone is predicting that Mervyn King will be putting pen to paper.

Just to remind you,the government's target rate is 2%.It is expected that due mainly to external forces of fuel and food prices,it may well be around 3.2% for May.

Watch out for the profits of doom after the announcement at 9.30.

Update 9.40 Inflation at 3.3% for May so letter on the way and prospects for stagflation as the Bank faces the prospect of putting up interest rates during a credit crunch.

Read John Redwood's attempt at forecasting the letter

“Dear Chancellor,

I am writing to report that inflation is now above 3%. This has come about because we held interest rates too low in the period 2004-6, allowing a credit bubble to emerge. The government’s decision to switch target from RPI to CPI made our task more difficult, as the CPI at the time was lower than the RPI, and has since proved to be a very poor indicator of the overall inflation people are experiencing in their daily budgets. Indeed the gap between RPI and CPI has got larger, meaning our failure on inflation as measured by the old target is worse. We felt we had to respknd to lower easier target once set.

The Spectre of Stagflation

Rather a gloomy front page for the Independent this morning which looks more like an advert for the latest Gothic movie.

In fact the paper is alerting us to the Spector of Stagflation.For those with shrt memories this is the joint appearance of high inflation and low growth.

Its economics editor,Sean O'Grady writes

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.

He points out the following

1. that the jump, from 2.5 per cent last month, is the most dramatic since 2002,
2. that unusually it is not a broad rise but
3. Food is 7.2 per cent up on a year ago, with analysts expecting 10 per cent inflation in a few months. And it's the essentials that are up the most – bread by 13 per cent, butter by 32. 2 per cent and eggs by a third. The increase in food prices is the fastest since 1990.
4. The twin effects of the credit crunch and the commodities crunch have sucked purchasing power out of the economy while increasing the cost of housing, food, energy and almost everything else
5. The 15 per cent decline in the value of sterling – as steep as when the pound was forced out of the ERM on "Black Wednesday" in 1992 – has exacerbated inflationary pressures. The fall is hitting living standards, especially for pensioners and the poorest

But more worryingly the Bank of England's policy is flawed

Matters are made more complicated because the Bank's "policy rate" is almost irrelevant when market interest rates remain stubbornly high, thanks to the credit crunch. Almost as fast as the Bank of England has been reducing rates the commercial lenders have been raising them and putting up their fees for arranging a mortgage, cutting the flow of funds into the housing market by a half.

The truth about inflation-possibly

Inflation seems to be the top of the agenda this morning.Why is the government maintaining inflation running around 2.5% when for most of the country it is blatantly a lot higher?

Yesterday the Tories published a cost of living report in which accoding to the report,

the prices of many basic household items - bread, butter and eggs - have seen double digit rises in recent months. Gas and electricity prices have also jumped by 10% in the last month alone.
In addition to this, council tax has doubled since Labour came to power, train fares have gone up by a third and the cost of running a car has risen by a half.

This morning's Mail has unsuprisingly jumped on the bandwagon

Since Mr Brown took over as Prime Minister nine months ago, the price of butter is up 37 per cent, a dozen eggs up 34 per cent and a loaf of bread up 28 per cent. The price of petrol has risen eight per cent in the same period.
Housing costs now swallow up more of people's spending than at any time since records began in 1987.

and the Telegraph writes of the government's mysterious inflation figures and explaining that

In 2003, partly to harmonise our practices with those of the EU, Mr Brown switched the measure from the Retail Price Index to the Consumer Price Index, which excludes many of the fastest-rising costs, such as council tax and house prices.
At the same time, there have been asymmetries in sectoral inflation rates. Things that we can buy from China have remained relatively cheap.

Fraser Brown over at Coffee House writes

The wider Tory point is this: you’re suffering, we understand, yet Brown claims you’ve never had it so good so he can’t be trusted. For as long as the PM is addicted to fake figures which jar with people’s experience, he is wide open to this powerful charge.

So where does it leave us? and more importantly can the Bank of England restore some cuts in interest rates when inflation,that is real inflation is seemingly on the rise?

Inflationary pressures

All good things have to come to an end. The benign environment where China and India delivered an ever more stunning array of goods at fabulous prices is changing into an era when Chinese and Indian demand puts substantial upward pressure on raw materials

Former Tory cabinet minister,John Redwood writing on his blog,which even if you don't agree with the politics is well worth a read.

In fact there are signs that the upwords pressure on inflation is continuing,rapid rises in fuel prices and food prices will make it increasingly difficult for the government to maintain its inflation targets thru this year.

As Redwood writes,it is difficult to understand exactly how the figures for inflation are calculated.Ask anyone in the street and all will maintain that their daily budgets are increasing.

What has kept inflation down is not the economic policy of the government but the globalisation of prices which has put pressure on Uk suppliers to fall into line.The phrase "rip off Britain" much used in the 1990's no longer really applies as the price of all goods and services have in real terms fallen.

Clothing is a prime example.The Primark effect has forced all major chains to reduce their prices.This has been done by driving down supplier costs and rationalising their own businesses.The detrimental effect in the UK has been to force companies to produce more with fewer staff.The consequence is that we are all working longer hours and are under greater work pressure.