Tuesday 13 October 2009

Can the UK avoid deflation?

Quite interesting numbers out from the ONS this morning. UK inflation has fallen from 1.6% in August to 1.1% in September. As we said earlier this year, it was always going to be hard to keep inflation in positive territory due to the energy price spike of last year. From October onwards these pressures will fall away.

In addition, the VAT rise in January will be another small boost to inflationary expectations. So all in all it looks on the one hand as if actual CPI deflation will be avoided; in the RPI world we have had deflation for most of the year.

However just look at the trend in the graph below (last month's ONS figures), it shows inflation falling away in a deep trend. Trends change, but this month this one has become more entrenched not less. We only need 2 more months of this trend to end up in CPI deflation.

So what does this all tell us?

1 - There is no sign at all of any real inflationary pressures, people betting on inflation for next year are way out. The Japan style deflationary scenario lay ahead of us with very low interest rates for years to come. Bad for saving, good for borrowing.

2- The Bank of England will probably increase the level of Quantitative Easing in November having seen these figures as it will be worried about scenario one taking hold - horse, stable door situation for them.

3 - The Pound will continue to drop due to 2. If you are making investments, try some denominated in Euro's or Aussie Dollars.


Old BE said...

RPIX is the most useful figure, and this is now going up again. RPI was always going to collapse as interest rates were slashed. CPI is a meaningless stat.

We won't know what's really going to happen with inflation until the election has happened. If Labour stay in we will see higher inflation due to over-egging of the fiscal and monetary stimulus. If the Tories win we might return to a low-inflation steady-as-she-goes approach.

Bill Quango MP said...

Low rate euro - the rate at the hotel or the airport is currently 1:1.

Are the French now coming over on the ferry to Dover Tesco to load up with cheap wine and cheese?

CityUnslicker said...

BE - too true, RPIX is the best measure - but it is highly negative!

My point is that the hyperinflation predictors are well off at the moment. I won't be getting a fixed rate mortgage for a couple of years that is for sure.

CityUnslicker said...

BQ - currency crash is going to make us prisoners in the Britian. Labour will be proud.

Demetrius said...

Quite what the CPI/RPI represent is a mystery. I have been under the cosh with inflation for a little time now, and all those like me. As for interest rates, whilst they are one persons costs, they are another persons incomes. As most of the government stat's these days are manipulated fictions, I do not think it represents the realities for the majority of ordinary people, especially those on lower incomes.

Steven_L said...

If inflation is so low, then surely real interest rates are high by historical standards?

Of course while we watch our currency sink savers know they are being robbed. This is nothing but a heist, one that would make Bernie Madoff proud, perpetrated by Mr King, who in the past has had the audacity to talk of 'moral hazard'.

As for import prices. I'm noticing that luxury goods with worldwide demand (Talisker, Penfolds Grange or bin 707 etc) have risen in price by around 20% since the devaluation.

Whereas mass produced quality products such as Leffe and Rosemount wine atre being heavily discounted. Why? As consumers tighten their belts and economise the producers of these products can't afford not to sell in the UK market.

Anonymous said...

@ demetrius

pull the other one, im sure you can find the time to read this


your comment is similar to many on the guardian website. i.e. everyone thinks their personal inflation is sky high. if these numbers dont fit your own world view right now, they must be fabricated!

Old BE said...

CU - according to your graph RPIX is about 2% and rising!

There are plenty of savings deals which give an interest rate above RPIX and CPI, savers can't complain too much - until they try and import something.

SL - until the rest of the rich world recovers manufacturers will still want to make sales to the UK even at lower profit margins. Remember that until recently we have been known as Treasure Island!

Stevie b. said...

bit late in the day for the aussie $ isn't it?

Marchamont Needham said...

will the pound be allowed to drop below one Euro? Doubt it, it's too psychologically important when there's an election in the offing.

Not that I'm suggesting the BOE isn't independant of course.

Demetrius said...

Anonymous, alas I am well over 70, as are my neighbours, and I can remember many and various indexes from the past. I did my Stat's under Allen. Referring to your link, the great majority of OAP's do not drink over much wine, regard anything like rotisserie chickens as too expensive, rarely if ever visit restaurants and hotels, do not have MP4 payers, Bluray discs, hardwood flooring, DVD hire, use leisure services, acoustic guitars, or have much in the way of peaches and cream. In nearby retirement flats 4 out of 50 have cars. We also know a few people who earn below average incomes, and are in much the same case. At present we are being ripped off by the local council and others. We do have bus passes but alas no service and the taxi tokens have been withdrawn. Curious is it not that the CPI/RPI figures that relate to those with certains patterns of expenditure bear no relationship to those who are reliant on the government for indexed linked income. Also, I should give up on the Guardian if I were you, it will make you go blind.

CityUnslicker said...

Fine comments today -

Demetrius, RPI and RPIX are best, but the bank use CPI - between them there is broad accuracy for inflation which is after all a hard thing to measure.

SL - Real interest rates are high, much higher now to get a personal loan or credit card than it was before and at much worse rates.

BE - savers can complain i think. if you are trying to live off a fixed income the current rates mean you are receiving a paltry sum each month. of course i am NOT advocating we raise rates, just that pensioners are having a very bum deal of it, as always.

Marchamont - it can and it probably will, they won;t be able to save it. We have not foreign reserves to throw away and learnt out lesson in 1992. Perhaps even before Christmas. As BQ points out, it is already 1 for 1 on any real exchange rate for a traveller.

Saturn V said...

Over at Letters from a Tory.

“The trouble is, if you compare sterling and the dollar, it is like two drunks propping up the bar”

- Mark O’Sullivan, of Currencies Direct, on the plummeting value of the pound and the dollar

Mark Wadsworth said...


James Higham said...

The BofE will doubtless bugger it up, if advisers like Blanchflower get at them.