Saturday, October 8, 2011
What is driving UK inflation?
This chart, covering inflationary developments over the last decade, tells quite a story. It is a story in seven chapters.
First, the Bank of England has failed to meet its two percent inflation target since 2006. There have been the odd occasions when it went below, but in general, inflation has been well north of the target.
Second, before 2006 the BoE were lucky. Prices for goods, such as electronics, were actually falling. This is the "Asia" effect, as China and other emerging economies industrialised and flooded the UK and other western economies with cheap goods.
Third, prices for non-traded services have consistently exceeded the BoE's target. The UK was secretly inflating for a decade at around 4 percent a year.
Fourth, wage settlements broadly kept pace with services inflation before 2006.
Fifth, things started to go wrong in 2006. Cheap Chinese goods no longer kept the inflation rate down. The BoE were forced to raise interest rates, and popped the asset bubble that kept the UK economy growing at 3 percent a year. The financial crisis wasn't far behind. By the summer of 2007, UK banks started wobbling.
Sixth, once the financial crisis hit town in 2008, wage settlements declined sharply and fell below the headline inflation rate. Living standards began to fall.
Seventh, quantitative easing led to a devaluation of sterling, and the prices of those cheap Asian goods began to rise rather rapidly. Recently, the CPI inflation rate for goods is increasing at roughly the same pace as domestically produced services. Overall, inflation is now rising at around five percent a year.
Anyway, if you like the data application, please circulate it to friends and family. It was meant to be seen by as many people as possible.
When time permits, I will put together more......