Wednesday 18 April 2018

UK Inflation falls again

Back down to 2.5% today.

I wrote last week of the challenge the Bank of England will have in normalising the economy and this is yet another example of this trend.

Historically, to maintain a 2.5% inflation rate you would have expected interest rates to be at around 4% to 5%. But now, after the financial crash, this just is not the case. Debt loads, both public and private are much higher (excluding the Banks whose balance sheets are around 50% smaller). This higher debt load means we are far more sensitive to interest rate changes than pre-2008.

The oft use quote is "this time its different" - but in many ways this time it really is, the macro-economy seems very resilient inspite of the underlying monetary failure of the State. Unemployment is very low by any historical standard, inflation  - even including house prices - remains low. The Government is glacially eating into the deficit. Even the Pound has recovered, which is a shame in many ways as it was such a boost to the sluggish economy of 2017. Abroad the Trump stimulus will help the US a while and the EU is climbing out of its decade long crash - albeit with some major challenges ahead in Countries like Italy that avoided fixing the banking systems.

As a backgound the, how can the Bank of England continue to raise rates in anything other than a tiny and anemic way? Also, more worryingly, is should anything go wrong with the current goldilocks scenario we are facing prolonged deflation with very few tools left to counter it.

Amazing really the Government, for all its evident crapness of people and policy, has still managed to oversee a good economy amongst the madness its manifest failings elsewhere.


Raedwald said...

I take it you discount AEP's Cassandra-like warnings of sclerotic German manufacturing, nil inflation and zero growth in the Eurozone recently pressaging a Euro recession on the way? Or Deutsche Bank's being brought to the front of the stability test queue?

I honestly don't know and don't have anything other than a layman's opinion. But I do rather hope our Brexit debt is denominated in Euros and drink to the prospect of £1 = €2 in 2020, despite the hit our exporters will take.

Silly, I know.

CityUnslicker said...

R - pleasure to see you here - AEP sounds plausible but has been wrong about everything ever..shame he writes so nicely and convincingly!

dearieme said...

Should we attempt to persuade Madam May to hold a general election?

James Higham said...

"Amazing really the Government, for all its evident crapness of people and policy, has still managed to oversee a good economy amongst the madness its manifest failings elsewhere."

In one.

CityUnslicker said...

Dearime, not just yet I feel. Need to do the Brexit Deed first, as is her destiny.

Anonymous said...

This time IS different - because we still have 500 million people in the UK labour market, and about 100 million of them would consider UK minimum wage a pretty good deal.

Blair changed everything in 2004/5 (not to mention Barbara Roche's contribution - basically deliberately forgetting about border controls).

Anonymous said...

CU - in this "good economy" real male median wages are still below 1997 levels, and the BoE inflation adjustment takes little account of the monstrous housing cost increase.

Affordable family formation for 20-somethings is becoming a thing of the past - all part of the ongoing demographic warfare.