Tuesday, 14 July 2009

UK inflation down; whereart thou, green shoots?

Figures released today show the relatively stable CPI inflation rate down nearly 20% on last month, from 2.2% to 1.8%. This measure has long been discredited as it removes housing costs which are the biggest single component of most peoples' outgoings in the the UK.

The RPI is much better and this shows a drop from -1.1% to -1.6, drop of nearly a third.

The UK is definitely in a deflationary tailspin and the numbers are going to get worse. Only a year ago oil was at nearly $150 and today it is at nearer $50. There is a huge drop to be factored in over the next 3 months. CPI itself may well go negative for a time.

With this is sight, there is no chance of the UK raising bank rates, nor really do I think the Bank of England will stop Quantitative Easing either, despite the respite they have given in the past month.

It is a big jump to see hyper-inflation from here, it may come to pass if too much money is pushed into the system to try and heal it. However, it looks as if the monetary stimulus is increasingly pushing on a string. The debts need to be paid down and the economy (including Public Sector) needs to re-balance to adjust the the new size of the market.

Shame the Labour government wasted all our money in the good times as now would have been a very propitious time to spend more public money to keep us going; sadly, as we are broke this is no longer an option.

It is a long way up from here, years not months.

16 comments:

Budgie said...

Good post, but what is the point of the Bank rate? No one in power takes any notice of it: not those daft enough to buy McBust's gilts, demanding what? 3.8 per cent; and the banks only supply new mortgages at 10 times the nominal rate. Only the poor saver is slapped in the chops with the current 0.5 per cent rate.

Blue Eyes said...

RPI is a nonsense figure because it includes mortgage payments which are still working their way through the massive cut in interest rates from 5.0 to 0.5. Didn't it used to be the RPIX which was the sensible measure? What is that doing? The CPI isn't a bad measure but it does exclude lots of "difficult" items which can't be measured sensibly across 27 countries.

The price of food and fuel are probably the most important factors at the moment and both are falling.

I am beginning to come round to your idea of a massive further stimulus.

I would like a free new kitchen for starters...

Blue Eyes said...

BTW as an aside the Japanese property bubble which caused so much misery: how big was their peak to trough compared with ours? Word on the street seems to be that property prices are now flat or at least the worst is over, but we have "only" seen about a 20% fall haven't we?

James Higham said...

UK jobless up - no green shoots.

Mick said...

the value of sterling is the key to future inflation. And I can only see that going one way.

Sackerson said...

"Where are ye?", surely.

Blue Eyes said...

Aren't we quite unlikely to start suffering from import inflation while the rest of the world economy is pretty unhealthy too? I get a regular spamshot from a gadget emporium and their prices seem to be falling faster than ever.

CityUnslicker said...

Budgie - you answered your own questions, the banks pay attention to it for saving, as does the BOE.

They want to discourage this of course!

CityUnslicker said...

BE - Well we can't afford the new stimulus so if we get it it is time to emigrate.
re Japan, their bubble was a bit bigger, 50 year mortgages et al. But the bust was 60-80%, not 20-40% as we have seen. therefore it is unlikely to the the bottom.

CityUnslicker said...

BE - that all depends on the currency as Mick says. If the pound holds up then we will see some price improvement in imports. if it falls again there is no way to keep import prices low. Imports are already falling steeply, our trade deficit has shrunk quite sharply.

Blue Eyes said...

Re: Japan, I meant if our crash isn't as bad as their was maybe we aren't in for a "lost decade"?

Re: Imports, if global demand for non-necessities doesn't pick up then maybe the prices even in devalued pounds won't rise too much. We are still relatively rich consumers compared to some markets...

Steven_L said...

My thoughts on Japan are that although we didn't have the 30 year export led boom as a precursor to the 10 year credit/property bubble, we have still had a 10 year credit/property bubble that has burst. Prices didn't rise as much, nor will they fall as much, but nevertheless a bubble 10 years in the making has burst.

The really big difference between now and Japan in my opinion is that this credit/property boom also happened in the worlds largest economy and the US banking system is in meltdown.

I very much doubt that the USA will fancy a 'lost decade' and they seem to be loading-up base money supply through all their rescue plans (which I have completely lost track of).

Last thing I heard they were pushing $1.25 trillion into the banking system, surely once unemployment peaks and housing bottoms out over there and banks start lending more again this money will go forth and multiply.

What happens then will surely depend on whether the powers that be have an appetite for rampant inflation of some kind (some traditional price/wage inflation would sort the debt hangover out) or whether they start to withdraw base money through open market operations.

Have we 'done a Japan' here in the UK? I think we have, however if the USA experiences inflation as a result of loose monetary policy I think it will arrive on these shores too somehow.

Budgie said...

Blue Eyes claims that: "RPI is a nonsense figure ..."

I beg to differ. In relatively stable times for the Bank rate (ie, not the recent rate crash to 0.5 per cent), the RPI is superior to CPI precisely because it contains housing costs.

Obviously no index gives more than a simplistic picture - that is the nature of a generalised index.

If Gordoom had specified that the BoE should use RPI, instead of the CPI, over the last few years, the housing boom would have been restrained, hence HBoS et al would not have been so exposed. There would have been, at least, less of a crash.

CityUnslicker said...

spot on Budgie

Anonymous said...

The RPI is also a bad figfure to use because it includes housing costs based on fully variable rate mortgages. It therefore excludes people on rents, people in council and other social housing and people with fixed rate mortgages. But that is part of the fascination of a recession. As the economy declines it affects people in very different ways and curing one problem only makes the problems that others have even worse. Hence low interest rates help young couples but screw the retired.

Anonymous said...

I suspect we will not see a truly big crash in house prices until next year. This is what happened in the last housing bust - there was a bust, then it flattened as the government tried to stimulate the economy, then that failed and house prices fell really badly.

Fact is that house prices will really fall when unemployment becomes significantly higher than it was last year (i.e. not until the end of this year) and when the banks give up on the "green shoots" and decide to liquidate their assets - i.e. reposses properties of people currently struggling to pay their mortgages. This will all happen next year.

Another factor propping up the housing market is there are still some people out there willing to take out mortgages at historically low rates of interest to buy properties that look cheap compared to 2008. Once that latent demand of bargain hunters dries up, the last prop to the property market will be kicked away. Prediction: 2010 for the property market to really plunge. Single room flats will drop up to 80%.