Tuesday, March 24, 2009

Still waiting for deflation

Today's inflation numbers were bad, although you wouldn't know it listening to any journalists.

The headline consumer price index increased to 3.2 percent, up from 3 percent in January. So did the retail price index (excluding housing and indirect taxes). This second indicator is now running at 3.5 percent.

The retail price index did fall to to zero, essentially for two reasons; the Bank of England cut interest rates to zero, and therefore pushed down mortgage repayments; while the government cut VAT. Both affect the RPI.

Price sub-indices confirm that inflationary pressures are actually increasing. Here are two such measures for food and household maintenance. The former increased by over 12 percent over the last year; the latter increased by over 7 percent. Both are ticking up sharply.

So where is this deflation that the Bank of England used to justify a zero interest rate policy? It is lurking in the over-excited imaginations of the MPC, but we can't see it down at the supermarket.

It is hard to exaggerate the mess we are in right now. Every key macroeconomic indicator is heading the wrong way; inflation is up, the economy is in recession; and unemployment is rising. The Bank of England hasn't met its inflation target for years.

Likewise, every macroeconomic policy instrument is being abused; zero interest rates; a massive fiscal deficit, and that ridiculous VAT cut. To add to this lunacy, the Bank of England has started to print money.

We are buried so deep in trouble that we can no longer see daylight.


  1. I haven't heard this word while I have lived in the UK so I am not sure if it is a US only word or not but the word "Stagflation" comes to mind.

  2. Alice, they can always claim their policies averted deflation and there will be no evidence to refute that.

    Several hundred billion dollars were expended on the Y2K problem, but on Jan 1 2000 no planes fell from the sky, no reactors exploded and the Earth remained in orbit. The media response was a loud "HAH! Where's your Y2K disaster?" Was there a problem (and thus tackled) or not? Do we need to see evidence of failure before we can believe the problem exists?

    I don't disagree with you, and I'm sure someone pushed the RPI figure into newsrooms to scare the public with deflation - but the truth is they'll get away with this.

  3. I think the trouble will come in the next 5-6 months. As the effects of higher petrol prices last summer depress the CPI, the media (which I think has noticed the current rises) will heave a sigh of relief and we will see more and more stories about 'Will the CPI go negative? Is deflation coming?' Etc etc.

    Of course we all know that once you get over the hump in pterol prices, come autumn/winter, there will be nothing to keep the indices down. VAT is scheduled to go back on in December I think. Oil is more now than it was before Christmas (and currently rising). It looks like a perfect storm for inflation to be rising 4%+ by year end 2009.

    Govt/BoE will do nothing, it will ignore the CPI rising, and concentrate on the RPI which will be lower for longer due to the rate cuts. Even that will start to rise as the effects move out of the index. By the time anyone starts to raise rates, reverse QE, raise taxes/cut spending, it will be too late.

    Double digit inflation here we come.

  4. @Chris, the word "stagflation" was coined by Iain Macleod, a British politician of the 1960s.

  5. London estate agentMarch 24, 2009 at 10:17 AM

    The RPI divergence from the CPI is amazing.

  6. You are aware that all three inflations measures are heading down overall though. Sure, two of them headed up this month, but don't you know the definition of trend? You can't go, "Oh the CPI was 3% last month, and 3.2% in February, therefore we're in for inflation not deflation." Except you're basing this on TWO DATA POINTS. What you have to do is look at the overall trend, and 2/3 of the way through 2008 to now, all three inflation measures are going downwards. I mean for goodness sake, near the start of 2008 you can see on the graph a tiny dip in the CPI, so by your logic we should've expected to see deflation. Except straight after, the CPI had a steep climb until 2/3 of the way through 2008.

    Seriously, your graph reading skills are woeful.

  7. @dearieme, very interesting, thanks!