Look to the inflation forecasts
Fraser Nelson 8:27pmIs inflation really falling? I am understandably taken to task by some CoffeeHousers for claiming that it is. When Brown claimed it was in PMQs yesterday, it was submitted to me as a possible Brownie. But what he says is perfectly true, and it's worth looking at in more detail - for this not only explains today's rate cut, but much about the nature of the deep recession we have now entered. It also underlines what I regard as a flaw in business reporting. You can pick up the papers and find the price of shares, bonds, wheat etc. But nowehere can you read forecasts – ie, where the markets think inflation, bank rates, forex etc will be in 6 or 12 months time. If the bank knows more than you, it can sting you for an expensive fixed-rate mortgage. And Brown can claim in PMQs that inflation is falling (as he did yesterday), and then mysteriously be proved right. There is an asymmetry of information: the public are told yesterday’s prices. Those with Bloomberg machines can find out tomorrow’s prices – or, at least, the forecasts. So the big story, the coming drop in inflation, isn’t being told.
The BoE made its cut today by looking at a variant of the below graph, CitiGroup’s forecasts for UK inflation. These show it has now peaked, and will fall as quickly as it rose. This is not a shot in the dark, but compiled by using all manner of indicators (factor gate prices, etc). Today’s news (30% drop in construction orders, 22% drop in new car registrations, 15% drop so far in Halifax house prices, IMF says UK economy will shrink – yes, shrink - by 1.5% this year) confirms the depth of the recession. Without demand, price inflation will collapse.
You can bet Brown is basing his political strategy on this graph, preparing to boast next summer that he has somehow tamed inflation. He’s itching to use the narrative and got ahead of himself (as he always does) in boasting about it in PMQs yesterday. Of course, if gas prices shoot up 50% this winter and don’t rise next winter it’s still bloody expensive to heat your house. But if next year’s prices are as unaffordable as this year’s, it technically counts as zero inflation. It’s just waiting to be made into a Brownie.
Today’s rate cut, incidentally, is a massive mea culpa from the BoE – as Iain Martin explains over on Three Line Whip. We’re in this mess mainly because they let the tap of cheap debt run for too long.
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Gawain
November 6th, 2008 9:04pm Report this commentI disagree. Brown will find it increasingly difficult to spin his 'Brownies' on the economy. It is all becoming too obvious to everyone how bad things are getting. He'll try to stay as far away from the issue as possible. If our interest rates are now lower than the Eurozone can anyone still believe that we are in better shape to withstand this than the rest of the world ?
They are more likely to spin anything else that can steal the headline pages from the economy. It probably explains why we had two full weeks of politicians on oligarch yachts and another two weeks of BBC sleaze with Brown and Mandelson giving things a nudge. They even tried to use the Congo as cover (where have they been for the last ten years). What diversion will they find next I wonder ? Why will the media fall for it again ?
Hugh
November 6th, 2008 9:56pm Report this commentFraser my hobbyhorse is Friedman's graphs which seemed to show a close relationship between money supply and inflation with a suitable lag.
Do you think Brown can buck those relationships like he has bucked boom and bust?
Can you show any graphical stats giving M1 thru' M4 over the last five years, and say whether you think Frieman's rules will still apply.
Simon
November 6th, 2008 10:12pm Report this commentWhat did this graph look like back in June/July/August/September, when Harry Hindsight, and all his supporters, are saying that the MPC should have recognised inflation not to be a current problem?
What about recession? It's only been about a fortnight that members of the government have been allowed to mention that we might be heading for one. Even if the MPC acts independently of the government, which it doesn't, can you just imagine what Brown's response would have been back in the summer to a major cut in interest rates in response to the worry of a major impending recession. On his watch!
It doesn't bear thinking about, does it?
Alessandre Bieri
November 7th, 2008 2:36am Report this commentEvery time inflation has gone up I've gone "Huh?", When we are entering a recession caused by a fall in credit and a fall in demand it is natural for prices to fall. There have been a few factors like the price of Oil and food which have been propping up price levels which are otherwise stagnant or falling.
Anyone who has bought a second hand car recently will see magnificent prices caused by nobody wanting to spend.
This interest rate cut aught to prop up the housing market to some extent, but I doubt many mortgage lenders will pass it on totally.
The fact is that banks still need a lot of money, and so they will pay through the nose for it (savers getting 2% above base) and will not lend it out in a hurry.
It was being too liberal with mortgage customers that got them into this mess, they won't make the same mistake again
Alessandre Bieri
November 7th, 2008 2:38am Report this commentIt looks like David Blanchflower was right!
After all those months looking silly, always voting for a rate cut the bank have finally decided to take a plunge.
Jim
November 7th, 2008 9:07am Report this commentNo, I still don't believe it as you haven't taken into account that government figures are now highly manipulated, such that they are useless.
John Williams at Shadow Stats has calculated that in the case of America, if figures were calculated using the methodology from the 1970's, then US inflation is already at 10%.
I don't know if anyone has done this work for the UK, but our government has copied a number of techniques to lower the official inflation rate. For example, food and fuel being removed from the CPI.
You just can't trust their numbers at all I'm afraid.
Simon
November 7th, 2008 9:56am Report this commentAlessandre Bieri
"It looks like David Blanchflower was right"
Well it does if "being right" is the same as "anticipating the Groupthink".
Why not wait and see if lowering interest rates has a positive or negative effect on the situation. Then we'll see whether he was right or not.
If being in tune with the majority is seen as the major determinant of correctness, then what chance is there for the next Copernicus, Newton or Keynes?
Ian C
November 7th, 2008 10:24am Report this commentInterest rate cuts of this sort and type (yes there are different types because of the reasons behind them) are indicative of disaster as Osbourne has captured.
We need incentives to pay down debt (i.e interest rate rises)so that both consumers and businesses that are over-leveraged can restore their balance sheets. This will be helped by ineterest rate reductions as financing costs reductions are utilsed to reduce debt.
It is not until this reduced cost has served to repay debt that interest rates will effect spending. So other measures are required - tax cuts. But these will increase government borrowing so putting upward presure on interest rates.
Either way we wil get interest rate rises in the medium term. The longer we get interest rate reductions the higher rates will go later.
No wonder the stock market reacted negatively. Whichever way you lok at it this governemnt is in the poo and such 'welcome measures' are indicative of the depth of that.
Barnaby Trubble
November 7th, 2008 12:21pm Report this commentTime for somebody, maybe a respectable magazine, to establish a reasonable measure of inflation. It's plain we can't trust the government (of any party) to do it, they fiddle the numbers. It's plain that inflation for some is not the same as for others. Maybe a student's inflation number, and one for pensioners, and another for low-income families. Then we could see what is really happening. Further, it needs to be presented in terms of change from a given start level, not the rolling percentage change we get, which is currently showing a downturn when most of uss are still getting lagging rises in many of our unavoidable expenditure, and we aren't buying the things which are showing an apparent price drop. If things I don't buy get cheaper, what exactly is the benefit to me?
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