Sometimes events move with their own motion and of their own course flow into each other. For example yesterday I was discussing a future boost to the UK money supply via the fact that changes to the Bank of England’s Quantitative Easing programme will mean that the UK will be issuing fewer Gilts (government bonds) than otherwise and thus sucking up less cash to buy them. I also discussed that QE was now looking ever more permanent which for those who feel that the stock of QE matters will also provide a boost. Now with a timing that will have the American economist Milton Friedman smiling from his grave we move today to the UK inflation figures.
Where do we stand?
There are two main components to this. Firstly we need to examine our inflation performance in recent times. If we do so we see that it has been above the 2% target for the Consumer Price Index since December 2009 and during that period it was over 3% -when the Governor of the Bank of England has to write an explanatory letter to the Chancellor- for twenty-eight months in a row. This was not such a surprise when you consider that the Bank of England was employing a policy designed to increase inflation called QE. You do not need to take my word for it take theirs.
Without that extra spending in the economy, the MPC thought that inflation would be more likely in the medium term to undershoot the target.
Actually it used to say explicitly that QE was to boost inflation but I guess someone figured that it was embarrassing and changed it! If you cannot change reality then try to change perception and all that.
Where this inflationary episode with the Consumer Price Index peaking at an annual rate of 5.2% last autumn really gets significance is if one compares it to the performance of the UK economy. If we look over the same time period we see that in the last quarter of 2009 our economic output (GDP at market prices) was 100.5 and as of the third quarter of this year the same measure was 103. If economic growth of just under 2.5% in just under 3 years is inflationary then we are, to use a technical term, in a right mess! But in fact of course we have a central bank which has pursued the wrong policy as QE has generated inflation (as it was designed too) but not generated much economic growth.
Real wages have fallen
This to my mind has been a main driver of why the policy has failed. The additional inflation has led to this from the Office for National Statistics.
Since the economic downturn in 2008 wages have not kept up with price rises
In many ways it is quite simple. Higher inflation has exceeded wage growth and led to a fall in real wages. Workers are accordingly poorer and have therefore spent less than otherwise. So our economy has had a downwards influence from something which was supposed to provide a boost. In twitter terms you might call that #policyfailure.
What are today’s numbers?
From the Office for National Statistics.
The Consumer Prices Index (CPI) annual inflation stands at 2.7 per cent in October 2012, up from 2.2 per cent in September.
Okay so we continue to have a problem what were the causes this month?
The main upward pressure came from the education sector (university tuition fees) with smaller upward contributions from food & non-alcoholic beverages and transport
What about our old measure?
The Retail Prices Index (RPI) annual inflation stands at 3.2 per cent in October 2012, up from 2.6 per cent in September. The largest upward pressure came from university tuition fees, followed by food and housing.
So we see that it rose at a faster rate widening the gap between it and CPI. Those who remember my discussion from the 29th of October about proposed “improvements” to the RPI will probably be having a wry smile at this point. The old target of RPI rose to 3.1%.
The underlying index for the CPI rose from 123.5 to 124.2 and if we look at the last three monthly rises of 0.5%,0.4% and now 0.5% we can see that these would have it even further above the 2% annual target if repeated.
This brings me to a fundamental difference between me and some economists. David (Danny) Blanchflower was in such a rush to say the below he forgot that it was his view too!
oops coalition argument that inflation falling just got booted into touch
He went on to say that he had always meant the forecast horizon when I asked but we engaged again. From Mr.Blanchflower.
Just to be clear that 0.32% of the 0.5% rise in the CPI caused by one-off rise in tuition fees has no effect on inflation in LR as drops out
If we ignore for the moment that he has just swept aside a price rise which some people will have to pay (although not him as he resides in the US) I responded with this.
How many more times will “one-off” be used. Isnt its frequent use a contradiction in terms? Ditto for temporary
To which he replied.
inflation is only 2.7% & economy is flatlining we are in a mess due to disastrous macro policy QE is economy’s lifeblood
I did not think that was actually a reply to my question but if we stick with it we see several things. Firstly the fact that inflation is 3.2% under the RPI measure seems to have been ignored. Secondly I would like to return to real wages. You see the latest data was this, from the ONS
Between June to August 2011 and June to August 2012, total pay for employees in Great Britain rose by 1.7 per cent.
Now if your pay rise was 1.7% would you think that “inflation is only 2.7%”? You are facing a fall of 1% per annum in your real wages if you use CPI or 1.5% if you use RPI. An odd description of your “lifeblood” don’t you think? Draining away perhaps.
Actually I believe that the position is worse than the averages tell us. We know that sadly our society has become very unbalanced between the “haves” and “have-nots” and this makes me suspect that many have had a lower wage rise or maybe none at all. Accordingly the downwards economic impact is likely to be magnified.
In addition we have those who are savers who see low interest rates on their savings which due to the Bank of England’s Funding for Lending Scheme is in fact getting lower but they are having to face persistent inflation. I doubt whether it feels like “only 2.7%” to them. Let us also remember that we will also have people on fixed incomes such as annuities and pensions and even some in this category (income drawdown) who have in fact seen reductions.
Borrowers seem to be losing too
From the ONS.
Mortgage interest payments: which increased the RPI 12-month rate in October by 0.1 percentage points but is excluded from the CPI.
Ahem isn’t Funding for Lending supposed to be reducing these? So savers get lower rates and borrowers get higher ones? I note also that according to Moneyfacts average credit card rates have risen to 19.1% per annum.
Over the nearly three years that I have been writing this blog my earliest and most constant theme has been that UK inflation has been too high. I opened with the correct view that we were in danger of such an inflationary episode and that it would have consequences which we would regret. Now three years later we are pretty much in the same place but sadly many seem to have learnt nothing. Those who told me this would not happen have twisted the numbers with words and phrases such as “one-off” “temporary” and “surprise” and they have dashed for other measures such as “core inflation” “CPIY” and “CPI-CT” and then usually abandoned them just as fast as they disappointed them too.
This has weakened the UK economy for as I have described above the latest figures tell us that current policy is hurting workers,savers and mortgage borrowers! That does not leave many does it? Well it does leave the banking sector benefitting and that policy is proving to be a bigger and bigger failure. In fact the UK banking sector is probably a fan of the group Hot Chocolate and this is my suggestion for them to sing at any karaoke evenings when they are with members of the UK’s political class.
Baby, it’s amazing just how wonderful it is
That the things we like to do are just the same.
Everyone’s a winner, baby, that’s the truth (yes, the truth)