UK Consumer Price Inflation has now been “temporarily” more than 1% above target for thirteen months in a row!

The situation in North Africa and Arabia is continuing to spread with crowd rallied not only in Egypt now but also in Algeria and the Iranian capital Tehran. Whilst these countries have autocratic regimes and their own issues my view is that the fundamental driver behind many of the protests is the rise in the price of basic foodstuffs that has happened since the latter part of 2010. An example of this is that in spite of the change of military leader there are now pay disputes on the streets of Cairo as real wages have been squeezed. Even though there has been a drop back from 500 the Commodity Research Bureau’s foodstuffs index at 491.73 is up some 23% on the 400 level it touched in late November.

Portugal’s Economy Shrinks

Another familiar issue is the problems of the peripheral nations in the Euro zone and a theme of this blog is that a deteriorating situation is  usually accompanied by a Euro zone official doing an impersonation of the Iraqi general who used to go on TV claiming that the Americans were being crushed just as Abrams tanks entered Bagdad! To this end step forward, Jean-Claude Juncker Luxembourg’s Prime Minister.

The Portuguese authorities did take effective actions. If this action would reveal itself as not having been sufficient, other measures will have to be taken, but I have no indications that this has to be done in the short-term.

If he was looking for an indication all he had to do was look at her bond markets! One might also muse on “effective” measures which are not “sufficient”. Either way the yield on Portugal’s ten-year government bonds rose to 7.58% which is a new closing high for her time as a Euro member. This time the European Central Bank did not ride to the rescue and was not seen as a buyer. Also this was seen on the ECB website.

As no SMP transactions were settled last week, it happens that the rounded settled amount – and the intended amount for absorption accordingly – remains unchanged at EUR 76.5 billion

Care is needed here as they were reported as buyers on Thursday and these numbers only include settled trades up until Friday so I expect them next week.

The problem for Portugal was the announcement that her economy as measured by her Gross Domestic Product fell by 0.3% in the last quarter of 2010 according to her National Statistics Institute. Added to this because of the government’s tightening austerity programme The Bank of Portugal forecasts a fall in GDP of 1.3 per cent this year. If we look back we see that the previous 2 quarters both had growth of 0.2%. So the pattern for Portugal now looks like a very strong start to 2010 where growth in the first quarter was 1.1% followed by a sharp slowdown and now a dip which is worrying. Portugal’s politician’s tried to emphasise that growth on a year on year basis was 1.4% in 2010 but this only reminded everyone that nearly  all the growth had taken place in the first quarter.

Projecting forwards from the latest numbers also has a concern as the fall at the end of 2010 was driven by a reduction in consumer spending and at the beginning of 2011 the government reduced public-sector pay by 5% and also increased the level of VAT which taxes consumption. So there is a clear danger of Portugal re-entering recession and staying there in 2011.  Falling economic output is one of the worst influences on a solvency problem particularly in a country which has had low economic growth rates since the 1990s. Accordingly bond markets are right to be concerned and Herr. Juncker needs to brush up his economics.

The UK Inflation Problem worsens

This morning the Office for National Statistics has released the following figures.

CPI annual inflation – the Government’s target measure – was 4.0 per cent in January, up from 3.7 per cent in December

RPI annual inflation was 5.1 per cent, up from 4.8 per cent in December.RPIX inflation – the all items RPI excluding mortgage interest payments – was 5.1 per cent in January, up from 4.7 per cent in December.

Why did inflation rise again this month?

The ONS told us that the rise in VAT to 20% was an influence as was the increase in the price of crude oil. The particular areas that saw price rises were fuels and lubricants(VAT and Crude Oil), restaurants and cafes (VAT),alcoholic beverages (These rose by 6.7% so the ONS’ s attempt to blame VAT does not wash here),furniture and furnishings, and car prices. We should be grateful for some sectors where there were price falls as otherwise the numbers would have been even worse. These were recreation and culture,miscellaneous, and clothing and footwear.

The same influences were seen on both the Retail Price Inflation numbers

Yet Another Statistical Manipulation

This happened to the clothing and footwear section.

The main downward pressure was due, though, to the weight for clothing and footwear being higher in 2011 compared to 2010. This means that the fall in prices between December and January this year had a larger downward effect on the CPI compared to a year ago.

Perhaps nice for the figures for now but if cotton prices remain where they are this will misfire fairly soon! For those who have not be following their rise cotton prices have doubled since mid-2010.

Remember the Producer Price Inflation figures

Last Friday I reported the following Producer price figures where output inflation was recorded at 4.8% and input price inflation was recorded at 13.4%. As you can see there is no drop back in inflation likely from the output figures and the input price figures suggest a further acceleration. They are perhaps the biggest criticism of the Bank of England’s stated view that inflation is “temporary” and the result of “one-off” factors.This is because they indicate that inflation is if anything building up in the chain that eventually leads to prices on the high street.

In fact these figures are likely in reality to be even worse as I reported on Friday they have been subject to a statistical manipulation by the ONS which in 2010 led to a reduction in the figures for output price inflation for every month recorded! Allowing for this I feel that the levels under the previous system would be 5.4% and 14.2%.

What does our inflation watchdog the Monetary Policy Committee think?

Let us go back to the quarterly inflation report from February 2010 and examine what it forecast for now. The emphasis is mine.

CPI inflation is likely to remain elevated in the near term, given the restoration of the standard rate of VAT to 17.5% and the continuing adjustment to the past depreciation of sterling, before persistent spare capacity causes it to fall back to below the target. ….. it is more likely than not that inflation will be below the target for much of the forecast period,

If we look at the accompanying fan chart we can see that the Bank of England expected CPI inflation to be approximately 1% at this time before drifting up to 2% in 2013. This type of forecasting has been a feature of it for some time. Firstly it was/is hopelessly wrong and secondly it always predicts inflation to be on target around the target horizon. We get their latest update tomorrow and with their record which is now shocking because it has been wrong time after time it will be hard to know whether it is right to laugh or cry. More importantly and this is the crucial point it means that they have set UK monetary policy with the wrong expectations for UK inflation leading to what I believe are policy errors. I notice some in the media concerning themselves as to whether this is deliberate or not but if you think about it this no longer matters. As this has repeated again and again then whether it is deliberate or grossly incompetent seems to me to be much less important.


As you can see the Bank of England has more than just a headache caused by rising inflation. It has consistently made the error of expecting inflation to be lower than it has turned out to be. Why this matters is that these forecast are used as a basis for the setting of interest-rates. Looked at like this I feel it is unarguable that monetary policy has been inappropriate and a policy error has been made.

As 2010 has progressed and moved into 2011 we have seen that the UK does have a persistent inflation problem. This is not on the scale of some of the problems we have had in the past but when you consider that we have just had a severe recession and you allow for that it is troubling. This is because should the economy begin to pick up and grow on a more sustained basis it is likely that inflation will pick up too and it will be doing so from a relatively high base. There are plainly issues in the background of rising commodity price inflation and we are letting it seep into our system forgetting all the dangers that have come from this in our past.

Apologists for the Bank of England argue that there is nothing it can do about inflation which is “imported”. This is an odd argument which is not far short of economic illiteracy. For raising interest-rates is usually associated with a rising exchange rate which does help with imported inflation,particularly if the rise is against the US dollar. Indeed it used to be one of the arguments of the Bank of England! I doubt they have forgotten. Please do not misunderstand me you can of course argue that you think that this would be the wrong policy my point is against those who are arguing it is not a policy option.

My Policy Prescription

As we look forward there is a continuing and indeed rising danger of inflation becoming embedded in the UK economic system. As our inflation watchdog is either asleep or not doing its job I would like to repeat the policy suggestion that I first made back in the autumn of 2010.

Also I have a further thought and it does indicate quite a change. As the role of the Monetary Policy Committee has changed and expanded more than could have been forecast when it was introduced in 1997 there need to be new checks and balances on its power. My suggestion for a change is that MPC members should stand for election as they are currently much more powerful than many of our elected representatives and their record is going from bad to worse.


16 thoughts on “UK Consumer Price Inflation has now been “temporarily” more than 1% above target for thirteen months in a row!

  1. I beg to differ , the BoE is only concerned with asset inflation in the housing market. The Banks it protects are concerned that a rapid fail in the housing market will lead them to bankruptcy.

    As for the rest of us , you’re right the MPC is a misrable failure, and, the main stream media seem oblivious to the problems they are causing. Interest rates will have to rise , and quite sharpley at that.
    That will pose problems for Tories as well – resession seems inevitable now.

    the Banks remain Unreformed , un-challenged , and Bonuses are really just a public Straw Man , God help us all……


  2. Re food prices. I, too, am concerned with this aspect and given the situation in UK whilst I cannot foresee rioting in the streets, I can see a significant segment of the population (pensioners) being forced into increasing hardship and often penury. With further spending cuts working their way through the system I believe this year will unpleasant (to say the least). On this topic, I have read little comment from the National Union of Pensioners – why?
    Re. Portugal. I have said in the past that the government should be allowed time for their ‘plans’ to come to fruition; it seems that time has arrived, and the results are abysmal. I now wonder whether it is beyond the EU (who I note have just raised the “bail-out pot” to €500 billion) to offer constructive assistance and that the IMF, of necessity, will be the “harbingers of doom” in the eyes of the majority. Short of a new election, I cannot see much hope on the horizon.

  3. There is a BoE defence.It is to state that demand for physical resources has globally met a point we it will continue to outstrip supply for food,energy and materials.Accordingly use of interest rates as a mechanism to combat this will have little effect.

    Of course a further admission would also be required that as a nation we have thrown away,sold cheaply and neglected our own ability to extract and produce civilised life’s essentials. Accordingly our experience of price inflation and will continue to be much worse than nations that did more than worship it’s bankers.

  4. Re: Imported inflation

    There is nothing the Bank of England can do about imported inflation?

    How about imported disinflation?

    The MPC was happy to take the credit for the NICE decade due to falling manufacturing prices thanks to China, but it’s a not-me-guv attitude when things run in the opposite direction.

    If it is true that they can’t do anything about imported inflation, the corollary is there should have been disinflation in the UK for most of the last decade! But of course, like a ratchet, (asset) prices can only go up, not down!

  5. Forbin, I certainly agree that the BoE is preoccupied with housing prices. Let us not forget that in recent memory the BoE was responsible for the banking sector, and with the plans to abolish the FSA they will be again. The banks must be aware that a drop in these prices will cause Bailout MK III (I think we’re on 3?).

    As for having the BoE elected I am uncertain as to what this will achieve. If the general public were to be responsible, will they not vote for the parties offering the lowest rates. Most are borrowers. I would be sceptical of the public’s (or by proxy the politician’s) ability to ‘take their medicine’.


  6. I agree with Forbin, we’re basically Ireland but trying to kick the can as far down the road as possible.

    Deflation in house prices = big trouble for the banks + big trouble for people banking on house price inflation (most people with high multiple mortgages) = bail out
    Therefore, the BoE do everything they can to prevent house price deflation.

    Life’s gonna get more expensive here in the next few years, but lower housing costs would release some money from renters and in turn boost consumer spending.

    Should have let the banks fail! They all bet all their money on red and lost.
    Should have let the investors in Ireland and take the loss!! They bet their money on a housing boom and lost.

  7. “As the role of the Monetary Policy Committee has changed and expanded more than could have been forecast when it was introduced in 1997 there need to be new checks and balances on its power.” But surely that point has therefore already been well passed? The dire error was to have ever allowed the MPC to so grossly act outside its remit in the first place; but it suited Brown to permit that informally in the manner which had become so prevalent and normal under Blair, because then no blame could then directly be placed on him, and their actions could be detached from supposed political dogma, although in reality they were just that!

    The proper and honest approach if it had been decided that the MPC should meddle in politics, would have been to have formally and overtly expanded its remit. This was never done and so the MPC has continuously acted outside its remit and its formally granted authority, and acted in a political manner, according to the political views of its members. That is and was illegal, and what is most surprising is that the new government has not acted to change or even challenge this situation, nor taken any legal action against the MPC members for so acting illegally? I believe this is only because the present government condones the present illegal policies of the MPC. I believe this is because the present government has decided that the only way out of their present fiscal difficulties is to use the inflation tool (with manipulated and deceitful inflation statistics) to further debase the currency on a significant scale.

    Thus, all this talk of inflation and any supposed failure on the part of the BoE and MPC to control it is in fact delusional. It completely misses the point that what is taking place is not an accident; nor due to incompetence or misjudgment at all. It is deliberate and premeditated Zimbabweh economics. There seems to be an agreed intent between the government, BoE and MPC to debase the UK currency perhaps to the point where it will become virtually worthless. Certain influential and wealth controlling groups privee to this intent have already moved into gold, other precious metals and commodities, to preserve their wealth. As more people begin to understand what is actually going on there will be a stampede into gold, and its price against fiat currencies will escalate. By then it will be too late to preserve much value I fear.

    This is again another example of the play between economics and politics. If you concentrate on the economics of the situation only, and what would be the right action to take for a proper outcome, then you miss the point of why this is happening. It is I believe a deliberate strategy, and we had all better get prepared for that reality and its final results. The question which then must emerge is why should this be so? Each of us must answer that for ourselves, but the probable reason is that it is a component in a global ploy run by those who control most of the world’s wealth, to impoverish the bulk of humankind so that they can ensure their continuing wealth and supremacy in a world where natural, scarce resources are beginning to be exhausted.

  8. Last couple of days I’ve been pondering why the head honchos of the BofE and the Fed aren’t bothered about being made to look like fools.

    The conclusion I have come to is that if you don’t mind being made to look like a fool, it can only be because you know you are not a fool, but are following a deliberate policy, which, if revealed, would make you look worse than a fool. So looking a fool is the lesser of two evils.

    I think they know exactly what they’re doing, but they can’t afford to be honest about it or the whole thing will come down – which is what they’re trying to prevent.

    It really is very much like the denials of the Iraqi information minister. I used to love his dispatches. They were so funny.

    • Hi Alex, sorry if I stole any of your thunder. It seems that you and I agree virtually entirely about the real reasons then?

      I like your reference to the ex-Iraq Information Minister. He certainly was an entertaining character, and I do see some resemblance between Mervyn King and him!

  9. Arn’t they just trying to prop up inflation rather than let deflation take hold. Then when the cuts take hold the deflation won’t be so bad. Roger Bootle -Economist has covered deflation quite a bit and he always says that inflation is prefered to deflation as once deflation kicks in it’s pretty hard to stop.
    Having said that, if u men have gone shopping lately u would see that deflation is slowly kicking in, prices are dropping ie; imperial leather shower gels normaly £1.29 ish last week .66p in sainsburys after weeks @less than a £1 in Tesco. As a consumer i hold out til the price is right, then buy lots when cheap, yes i’m stockpiled it works cheaper this way…prices dear folks are slowly coming down. Even fruit & veg are getting slightly cheaper with milk and meat holding. Soon some of these retailers will go bust, that worries me. I predict world depression. As 2 the banks let em fail next time, i pray for that.

    • Hi Ms Drummond

      I just wanted to add something to this. “Roger Bootle -Economist has covered deflation quite a bit and he always says that inflation is prefered to deflation as once deflation kicks in it’s pretty hard to stop.”

      In the UK once inflation has got hold it has proved very hard to stop too. We seem to have a lot of economists who have fogotten our own economic history……..Accordingly I think that this makes them get the balance between deflation as you put it (disinflation to me) and inflation wrong in my opinion.

  10. 4 got to mention that cotton prices in the great depression were dirt cheap so if we deflate that won’t be a problem & they had severe drout.
    Also when u are surrounded by weak economies it is a mute point to be laying blame for how we got here. china & germany have handled their finances well but when exports start 2 fall they 2 will be sucked into the vortex we call economic deflation, today u laugh @ me tomorrow u won’t and in my humble opinion the BOE has figured this deflation scenario out & Roger Bootle – Economist & their old advisor has long ago as 2005 he saw this all coming. Read his books if u don’t believe me; it’s not all doom and gloom i promise u

  11. so what happens then in this country when inflation peeks, surely supply & demand drops it down again?
    I’m brit but grew up in cda, been back 21yrs in the 70’s they had the inflation but in the 80’s they couldn’t give it away except food & clothes which i think remained stabble & the supermarkets that undercut on food eventualy went bust.
    Why would the uk be different? Is it the housing benefit system that props it all up? Over the pond u didn’t have that yet the dole element same as here. There must be reasons why we are different. Do we always devalue the pound 2 climb out of trouble?
    Either way i see like i said above price softening & i still think this is headed 4 a world depression. As i have been studying the economy as a lay person since the mid 80’s as i wanted 2 be an economist but couldn’t afford 2. All the reading i’ve done makes me think the west is in trouble 4 now. Gd having ur feedback

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