Tuesday 16 June 2009

UK Inflation; Refusing to conform

This is a story that can be overdone in the reporting of it, but nonetheless is of some import.

The UK CPI inflation rate has dropped from March 09 to April 09 by 0.1%. Instead of 0.3%. Ho hum big deal, the rate is now just 0.1% above the Bank of Balls (that should read England, ed) target of 2%.

However RPI remains firmly in negative territory at -1.2%.

Much of the media is saying that this fall less than economists predicted is very worrying. Well yes and no. Economists tend to get everything wrong and over the past year they have been living up to this reputation spectacularly. It does not matter if things are about by 10 basis points or so.

However, inflation is being loaded into the system via printing money. Just today a very canny hedge fund (up 234% last year, no less) decided that hyperinflation was on the cards and it has started to raise funds for a new fund to make money out of this. last year they thought the banks would all fail, so I for one am not going to bet against them. They have a lot more riding on it than the say so of economists.

CPI does not look like it is going to go negative this year, or to do so only for a few weeks; so hooray for Printing money! The pain of this success is yet to come, that is for 2010 and beyond.


Simon Fawthrop said...

The easy bit is the printing of money and lowering interest rates. The hard bit is tightening the money supply by raising interst rates before inflation takes hold.

I'm not holding my breath that Gordon will have the balls to do it even if somone calls he timing right.

So what do you think about Gold as a hedge against inflation for us savers?

AntiCitizenOne said...

Farm Land is the one I think will be best.

Pity it's still overly expensive cos people might want to put a house on it.

not an economist said...

"The UK CPI inflation rate has dropped from March 09 to April 09 by 0.1%. Instead of 0.3%. Ho hum big deal, the rate is now just 0.1% above the Bank of Balls (that should read England, ed) target of 2%."

Isn't this a tad too flippant?

The crucial point is that the BoE has embarked on a massive progamme of monetary pumping thru both QE and virtually zero based interest rates.

Some market economists have warned strongly agaisnt this, advising that monetary easing on such a scale will result in excessive infaltion combined with continual rising unemployment - i.e., stagflation. Such views have been summarily dismissed on the grounds that the real fear is deflation.

Well it aint happneing - as the CPI figures clearly show. And if the deflation isn't happneing then we have to ask ourselves where we will go now. I would suggest double digit inflation - maybe in the 20 or 30 per cent range.

To my mind the fact that inflation is stubbornly remaining above govt target shows that Brown/Mandelson's strategey is flawed and will push us into a much worse place than we were just last year.

Moggs Tigerpaw said...

When governments "max out their credit cards" they print extra money, that makes inflation.

It looks less now (even like deflation) because of the drop in interest rates lowering lots of mortgages. But it is not real in the long term.

When it all drops out of the figures I bet it looks like inflation instead.

CityUnslicker said...

TGS - Not sure about Gold at these prices. Seems to have a top at just over $1000...and last year it got delevered just like everything else. In a real inflationary sceanrio you'll be fine with shares and property.

ACO - Yup.

NOE - Flippant, of course. What i meant was the figures are all very smalll changes to argue over. the poitn you make about huge imapcts to come is more relevant. Why argue over 0.1% inflation when it could get to 10x that?

Moggs - Thanks for the comment. indeed, housing does have a big impact - but using that we do have real deflation. if RPI had been used through the boom, then we would have had higher rates which would have been a good thing. CPI is a bad measure of inflation.

Old BE said...

I hope you are wrong about hyperinflation, but I fear the worst. The danger with easy money is that people become used to it, so as soon as rates go back up to more normal levels the economy will collapse back down again. It started to hurt when inflation hit 5% last year, just imagine how difficult life would be if we got to 10 or 15%.