Today's surprise inflation figures have strengthened Darling's hand as he tries to prevent another stimulus
Andrew Neil 10:52am
In the current unprecedented economic circumstances, politicians and policy-makers are having to learn as they go. So are economic commentators. It was widely predicted by economists in the City and the media that the latest inflation figures would show the Retail Price Index (RPI -- a broad measure of inflation) plummeting into deflation territory with prices falling by around 0.8 percent, while the Consumer Price Index (CPI -- which excludes housing costs) would slump from 3 percent to closer to 2 percent, a harbinger of further falls to come.
They were wrong. The headline RPI fell only to 0 percent in February from 0.1 percent in January while the CPI rose to 3.2 percent in February from 3 percent. Even the underlying rate of RPI inflation rose to 2.5 percent from 2.4 percent. If, as a lay person, you're baffled, you have every right to be: there's a lot of egg on a lot of economists' faces this morning!
Consider the bizarre position we are now in: on the one hand the RPI is zero, its lowest rating since March 1960, when Harold Macmillan was Tory PM and a young Senator called John F Kennedy was running for President. On the other hand, the CPI is over 3 percent, which means Bank of England Governor Mervyn King has had to write a letter to the Chancellor explaining why CPI inflation is more than a full percentage point above the official 2 percent target.
In his letter, Mr King said that despite the increase in CPI inflation last month "we believe that the sharp decline in CPI inflation since its peak in September is likely to resume in the coming months. It is likely over the next year CPI inflation will move below target, although the profile of inflation could be volatile. [my italics]"
So instead of all the worries about deflation, the Governor and the Chancellor are engaged in a discussion about why inflation is too high! Bizarre indeed: it suggests that the inflation dragon is not quite as extinguished as many economists would have us believe and that deflation is not quite the threat it's been made out to be.
So what's going on? Well, the RPI is zero largely because mortgage costs and house prices have plummeted as interest rates have collapsed -- but not by as much as experts expected. The number of mortgages approved for house purchase increased for the third month in a row during February, rising to 28,179 from 24,278 in January, according to the British Bankers’ Association, which suggests that the housing market is not quite as moribund as we thought.
The CPI does not reflect housing costs but does measure the cost of things people are buying in the shops and it's rise to 3.2 percent suggests that prices on the high street are more buoyant than has been reported. Two reasons why that might be so: collapsing mortgage payments have given some families more money to spend; and the collapsing pound has raised the price of imported goods (especially food and drink -- and transport, which depends on imported fuel). Together they have pushed prices up.
No doubt the RPI will slip into negative territory in the months ahead and the CPI will resume its descent, as the Governor predicts. But those who have been warning that the government's massive fiscal stimulus, unprecedented borrowing and printing of money will unleash a huge inflationary spiral will be feeling a little vindicated this morning. Inflation not yet dead, even in these recessionary times, and it could soon return with a vengeance.
The political fallout from this morning's surprise figures is clear: the Chancellor's attempts, with the backing of the Treasury, to see off Gordon Brown's pressure for yet more fiscal stimulus in his April 22 budget have been strengthened. Yesterday the Chancellor could point to the support of the head of the European Central Bank, who came out against further stimulus, as have the President of France and the Chancellor of Germany. Last night the boss of the IMF was also sniffy about another boost. Now the Chancellor can point to an inflation rate over 50 percent above the government's official target as another reason why he shouldn't take any more risks with the economy.
Gordon Brown used to taunt the Tories that there were the only ones against a fiscal stimulus. That was then. Now it looks as if the only ones in favour of more pump-priming are the PM and the man he calls "Barrack" in the Oval Office.
Previous
rmh
March 24th, 2009 11:02am Report this commentThere is no inflation. Just a fall in mortgage bills.
http://burningourmoney.blogspot.com/
Tom Pride
March 24th, 2009 11:14am Report this commentMerv 364 should get out the bank and down to the supermarket, where I was on Sunday. The increase in prices is there in your face. It is manifest. Not a penny here and there but increases that jump out at you.
Don’t economists do a supermarket shop?
kinglear
March 24th, 2009 12:00pm Report this commentIt's a phoney war - REAL inlation is on the up because of the fall in the pound. The RPI figures are entirely distorted by the fall in mortgages and fuel costs from last year - give it a month or two and we will be wondering what all the fuss about deflation was for.
oldtimer
March 24th, 2009 12:12pm Report this commentThe people making these forecasts are not out in the real world. Prices are going up on the things we actually spend money on. Si neither I, nor my wife, are baffled by this result as you put it.
If it is this bad now, we fear what it will be like when hyper inflation strikes, courtesy of Mr Brown and his misguided "action".
Publius
March 24th, 2009 12:14pm Report this commentWe keep reading that the CPI is the "government's preferred measure of inflation". Except, it seems, when it suits their spin machine to highlight the currently lower RPI.
The papers seem slavishly to be following this spin, either out of stupidity, or out of craven acceptance of instructions from Number 10.
Meanwhile transport costs are up, Council Tax is up (yet again), food prices appear to be soaring (9% in Feb). And the people who are subject to this continuing inflation are precisely the people who DO NOT have mortgages.
Really, I increasingly suspect the whole thing is a ham-fisted con trick in order to inflate the irresponsible government debt away.
C Powell
March 24th, 2009 12:35pm Report this commentIt's not lay people as you put it who are baffled because, unlike the commentariat apparently, we go to the shops and know what everyday things actually cost. Given how much we import and the 30% drop in the £'s value, why is anyone surprised that prices are going up?
This deflation nonsense is being used as a ruse. Inflation is what we have to fear. Name me one country where the government prints money & debauches the currency which does not then suffer high inflation, if not hyper-inflation. Interest rates should be higher thus making it worthwhile for savers to save and banks to lend.
Ed B
March 24th, 2009 12:43pm Report this commentCompletely OT, but why is it that the Previous button points to the next post and the Next button points to the previous post? I know the Spectator prides itself on its charming eccentricity, but this is just silly.
Robert Williams
March 24th, 2009 12:47pm Report this commentFrom the BBC summary of Winners & Losers "Those who do not own their own home but spend their money on food and games. They lose."
Bad news for bread & circuses.
As Tom Pride notes above, prices in the supermarket are increasing by 25%+ at a time. Sometimes the price then plunges again. I wonder if it is manipulation for the advertising war between supermarkets.
TrevorsDen
March 24th, 2009 12:53pm Report this commentDo not worry the politically neutral and economically objective BBC will explain it to everybody.
Brown is out on a deflationary limb, interesting to see how long it takes his weight before breaking.
The governor of the BoE was today saying how carefully he is monitoring QE to be sure that inflation does not take off.
Hmm...
Tiberius
March 24th, 2009 1:16pm Report this commentMy employer's rate of inflation has been in double figures for at least six months because it imports so much from Germany and the States. But someone who deals in second hand vehicles will undoubtedly be suffering from deflation. It's all in the product mix.
I'm sure the medium term will bring inflation and, therefore, higher interest rates. The present may be a good time to increase your debt (if you have capacity to do so), but the real trick for homeowners on a tracker mortgage now, will be to estimate the best time to jump on to a fixed rate.
Oscar
March 24th, 2009 1:19pm Report this commentPublius - literally on the money. The deflation spin has given cover for Gordon's reckless QE scam. Inflation and rising unemployment. That's the reality of bankrupt Britain.
Susan Hill
March 24th, 2009 1:22pm Report this commentI keep on saying that houses round here are selling and the estate agents report many enquiries.. prices are static but they are not crashing. Sold notice boards are all round me.
Every time I say it I get a deluge of jeers from fellow coffee housers.
Now maybe people will listen. Houses are selling. Not all houses, not over-priced houses, not buy-to-let city flats. But the housing market is still alive and well.
Ian W
March 24th, 2009 1:41pm Report this commentEd B - what a relief, I thought it was just me that found it strange.
tory granny
March 24th, 2009 1:42pm Report this commentOf course inflation will rise.
"Quantatitive easing" i.e.printing money + low interest rates = inflation, before you even factor in the falling pound,increasing food bills, council tax rises etc.
Inflation is going to soar.
Oscar
March 24th, 2009 2:00pm Report this commentBen Brogan worth reading:
"Stunned looks in the Commons a short while ago. Mervyn King dropped a bombshell in his evidence to the Treasury Select, namely that he doesn't think there is a case for another fiscal stimulus. At a stroke he appears to have demolished Gordon Brown's reasoning for the G20 summit and the Budget by saying we can't afford another injection into the economy."
Puncheon
March 24th, 2009 2:03pm Report this commentThose of us who are longer in the tooth will know that this is not the first time that a Labour Government has wrecked the economy and then taken refuge in inflation - the Wilson lot did it in the late 60's, and beggared my parents' generation. A Conservative Government was then elected that hadn't a clue what to do - they had a leader (Heath) who couldn't bear to appoint able people to his Cabinet - remind you of anyone. And so the country had to endure another dose of incompetent Labour rule before the glorious Thatcher revolution. I wonder if we are about to witnesss the farcical repetition of history?
Puncheon
March 24th, 2009 2:04pm Report this commentThose of us who are longer in the tooth will know that this is not the first time that a Labour Government has wrecked the economy and then taken refuge in inflation - the Wilson lot did it in the late 60's, and beggared my parents' generation. A Conservative Government was then elected that hadn't a clue what to do - they had a leader (Heath) who couldn't bear to appoint able people to his Cabinet - remind you of anyone. And so the country had to endure another dose of incompetent Labour rule before the glorious Thatcher revolution. I wonder if we are about to witnesss the farcical repetition of history?
TrevorsDen
March 24th, 2009 10:23pm Report this commentI wonder ... I would never qualify for a job at Bletchley Park - but I wonder if "there is a case for another fiscal stimulus" is code for 'interest rates will have to rise in 6 months' ??
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