Priced in

First of many. I remain firmly of the view that quantative easing will build inflation back into the system - after all, how else can the government of the day (of whatever persuasion) get the debt down?

But at least this inconvenient jump in inflation will reverse itself in a few months.

Is that 12 or higher?

What is the "factor" of the rise for the VAT gerrymandering? How long will it take for information to come through to demonstrate that the VAT cut worked or otherwise? Certainly the monthly retail figures do not support any success for the measure, unless we got a "run" in December 2009

When you devalue you currency by 20% against most major currencies is hardly surprising that inflation starts to wind up. With no evidence that British companies are using this tool to go on an export drive, the economy is surely going to be in slow motion for the next few years.

"Disappointed but not surprised."

Good to see the article you link to has had the headline changed. It was originally something along the lines of 'Inflation beats expectations' which made it sound like a good thing.

"This inconvenient jump in inflation".

Why inconvenient? Because it means the Treasury and BoE are going to have a hard time trying to convince everyone that QE is still needed to get the 'recovery' going, when in actual fact it's needed so the government can keep spending money it hasn't got and can't raise through taxes/cuts?

"But at least this inconvenient jump in inflation will reverse itself in a few months"

Oh? What else is in your crysal ball?

And maybe I'm being thick, but I'm at a loss to understand why a VAT rise *this* month has produced inflation *last* month?

It's QE, surely - punping tens of billions of pounds of fake money into the economy has deflated the currency and propped up any non-sterling assets; eg gold, house prices etc. But alongside that you get price rises - particularly on imported goods. Add that to the punitive taxation on fuel especially, and you get a whopping hike in inflation.

Hmm. Our rubbish here hasn't been collected in five weeks, the country is in terrible debt, strikes breaking out everywhere, the rest of the world laughing at us, inflation running wild... It must be a Labour government!

Please, please, please, whatever else you do with your lives people, please, never ever ever vote Labour again. Vote for *anyone* else. Do not vote for these morons.

Core CPI, which excludes food, energy, tobacco and alcohol, rose by 2.8% on the year, which is the fastest pace of growth since records began in January 1997.

Frankly, I fail to see the use of an index that excludes the two most important sections of personal expenditure - food and energy.

#5. FrankFisher wrote:

"Our rubbish here hasn't been collected in five weeks... It must be a Labour government!"

Or maybe it's just the weather?

Hi Stephanie

Firstly may I say it is good to see a fellow woman giving her view on economics!

However whilst some of this rise in inflation may be temporary you do seem rather complacent in your views. Weren't you one of those expecting it to fall and even go negative for a sustained period?I have been following https://notayesmanseconomics.wordpress.com and he has been pointing out for some time that virtually all rises in inflation in the UK are called temporary!

Pogo:
"'Core CPI, which excludes food, energy, tobacco and alcohol, rose by 2.8% on the year, which is the fastest pace of growth since records began in January 1997.'

Frankly, I fail to see the use of an index that excludes the two most important sections of personal expenditure - food and energy."

It helps obfuscate Gordon's gargantuan financial incompetence so is invaluable.

I don't normally see headline inflation indexes as representative of what is, or is going to happen, in the economy however can anyone explain to me why inflation is certain to 'fall back' in a couple of months ?

This comment was removed because the moderators found it broke the house rules. Explain.

Interesting that oil price fluctuations have had such a marked effect on these inflation figures. Many commentators think this is just as significant a factor as the VAT changes.

We'd better hope that the Peak Oil analysis, as set out by the economist Jeff Rubin and others, is wrong, otherwise the global economy is going to get the shock of its life over the next 15 years.

With the BofE printing money like there's no tomorrow and Sterling devalued by 20%, the wonder is that inflation is only 2.4% (RPI). But a look at the graphs on the the ONS website will show in which direction it's heading.

Folks: index linked savings certificates are still available from National Savings, if you don't fancy converting your money to gold, Renminbi, Norwegian Krone, Euros, Swiss Francs, or whatever.

Why so surprised? We all knew that the VAT reduction was going to end when it did. We keep getting told that the 'markets' have these issues already 'factored-in' so why should there be an inflationary effect when VAT merely RETURNS to its standard level?

This is just the latest round of City shafting for the great British public.

Anyway it will probably be overtaken in seriousness by the 2nd part of the Double-Dip expected by June

sounds logical to me with unemployment still riseing and the public sector about to get a hammering. deflation is still the problem given where interest rates are. near zero rates for this year atleast.

#5: "And maybe I'm being thick, but I'm at a loss to understand why a VAT rise *this* month has produced inflation *last* month?"

Inflation is normally quoted as an annual measure. VAT was cut in December 2008, so in November 2009, inflation on an item costing £1 before VAT was (115-117.5)/117.5 = -2.13%. But in December 2009, the inflation on this item was zero (115-115)/115, causing the overall rate of inflation to increase. In January 2010, inflation on this item will be (117.5-115)/115 = +2.17%, which is why overall inflation is expected to rise still further.

Hmm. Our rubbish here hasn't been collected in five weeks, the country is in terrible debt, strikes breaking out everywhere, the rest of the world laughing at us, inflation running wild... It must be a Labour government!

If you believe that inflation is running wild at 2.9% you have a very short and or selective memory. And of course, in your memory, strikes fall when there is a Conservative government.

Why is the cost of living (CPI or RPI) indexing always confused with Inflation. Inflation is the act of pumping-up the economy with borrowed money. It is the same as an individual taking out a mortgage. It Inflates the situation and distorts the real value. In the public sector it is known as the PSBR. Mr Darling has been very busy of late borrowing money to pump-up the UK economy to simply stay afloat. This act has now started to devalue the currency and thus leads us towards increased prices. It has been made worse by Quantatative Easing where the BoE spends money it does not have buying government bonds. So the act of borrowing produces a rise in the cost of living. The recent increase quoted as 2.9% is a drop in the ocean and is nothing to do with Inflation rather the consequences of Inflation. The real Inflation rate is well above this figure and if we take the borrowing for 2009 and express it as a percentage of the total public spend then that will be the real Inflation Rate. I wish the BBC and others would stop all this misleading nonsence and explain to joe public how things really are. If you require any help please letme know.

#5 Frank Fisher: The reduction in VAT last December lead to a reduced CPI/RPI figure for that month. This has now dropped out of the figures (which are a rolling annual total). Next month VAT will go back up to 17.5% which will push CPI/RPI up and lead to an exceptionally high mothly figure which will be with us, in the annual rates, for another year.

None of which alters the fact that we are walking a tightrope without a safety net. We can explain the current jump in inflation by reference to the VAT change and/or oil prices last year: but what happens when oil and other import prices start to push up this year? Any suggestion that inflation is going to take off would lead to a squeeze on Government borrowing and on the £: both of which could quickly feedback into inflation and a negative spiral.

I sincerely hope that someone out there knows more and better than I do - because I'm finding it hard to see any other outcome. #2 Stronghold_barricades asked the right question. Who says that inflation will come down "in a few months" - or are we simply being asked to rely on the fact that next January these December figures will drop out of the total?

If so, then you must be working on an assumption that inflation in general will remain subdued. It would be interesting to know where that confidence comes from - but I don't expect any answers.

FrankFisher And maybe I'm being thick, but I'm at a loss to understand why a VAT rise *this* month has produced inflation *last* month?

They will not be sure until the analysis is made and history revised but it appears that we went on a spending splurge to avoid the VAT increase. By the laws of supply and demand prices will have increased or at least held firm. Also retailers will have taken advantage of the situation.

Frankly, I fail to see the use of an index that excludes the two most important sections of personal expenditure - food and energy."


Too volitile and not majorly influenced by monetary policy. Commentators here would be the first to complain of the inflationary or deflationary benefits from factors outside the control of the state. As you are doing now.

More waffle Stephanie

Your predictions have been wrong for a whole year now. Time for you to consult 'Mystic Meg' in time for your next guess.

The rest of us know inflation will keep on rising.

It appears that the "economy" is being defined by how well the banks are doing and as we can see they have a lot of excess money. With unemeployment high and stagnant it is difficult to see where the inflationary forces are founded. If there is an excess of currency one would think that it would be being loaned out at low rates. Since banks trade money now and are not seen as investors in the businesses that create jobs, other than banking jobs, it may be time to separate the financial services as an independent indicator and most certainly regulate them with new and better regulations. The banks and politicians have created a process that benefits the wealthly and does not have a process that creates core business and employment. The money traders should be classified differently from "banks" and banks should be tied to individual investment and business loan development. Currently bankers only focus on accumulation of wealth in large sums and have leveraged wealth using and risking the savings of individuals. The banks claim that paying back taypayer governmental loans should free them of any future obligations. This fails to recongize the damage they caused in the overall enconomy. With their continued selfish and greed oriented view of the world they proceed on the same path with no remorse nor feeling of respoonsibility for what they have done. The politicians are happy to support this view of their friends and patrons.

Page 17 of the ONS statistical bulletin: comparing the main index with CPI excluding indirect taxes (eg VAT), it appears that the VAT cut reduced the index by ~1.4 points when it came in in December 08.
What next?
If the VAT increase somehow magically has zero effect on prices and the January index is exactly the same as current (112.6), the comparison against the nadir that was January 09 (108.7) will put the YoY CPI headline figure at +3.6%.
A reversal of the VAT-effect on top of this would bump the index up 1.4 points (to 114.0). That would make the YoY CPI headline figure +4.9%!
Either way, it's going to be a big scary, headline-making number.

As Thatcher said - the trouble with socialist governments is that sooner or later they run out of other people's money. Having built a huge deficit (despite all those taxes over the years from the nasty bankers) they now spend one third more every month than they take in taxes (try that from your family budget !) and having maxed the national credit card have printed money like confetti. (Sorry lets call it a silly name instead to get round the Eu rules against printing money). The pound is down (not "the pound in your pocket" of course !) We import stacks from China (clue : if the pound is weaker will the cost of those good go up or down ? what does this do to inflation ?) We import most of our food (same clue - but heh we cant have everything go up so lets exclude that from the measure of inflation ! The Marie Antoinette measure of inflation). We spend money on lesbian fruit and veg co-ordinators, Bloody Sunday inquiries et al, but our hospitals are overflowing with the injured elderly because we ran out of grit in a cold spell and our troops have been dying from lack of equipment. We nearly ran out of gas (again) and we forgot to start building new power stations. UK business has been propped up until the election by the Bank of HMRC forced lending of £30bn, now about to unravel. The government has been focussed on ripping everyone off on expenses (but lets see if they can get the evil dentists now banker bashing is getting stale and see if that can carry their income through to the bitter end so they can escape politics and collect their pensions (being about the only ones left worth having after they trashed everyone else's). Heh ho. Disappointed but not surprised. The good news is that its still the annual rate not the rate for the month.

It is only a matter of time before the fiscal lunacy of the New Labour project results in Weimar-esque inflation here in the UK.

New Labour are to be congratulated - they promised to be a "radical" Government - we did not realise at the time that that meant the destruction of the free market, the expansion of the big state & inter-generational debt lasting possibly 150 years.

The Conservatives have systematicaly failed in opposition to fight this madness - & the dear old left wing BBC still cannot bring itself to report the truth impartially & objectively - & sdaly I include you in that Steph - as much as I have always enjoyed your insight.

Regards

26. Operation Overlord

Amen !

Surely this is the first time we are seeing the real inflation figure in a while - as it's the first month in 12 that the target and comparison month have the same VAT rate.

I still believe inflation is going to be the UK's financial story of the year. I expected the CPI to go back up to 5% this year, but it looks like it could happen remarkably quickly. If we get the same jump up next month as we got drop down between Nov and Dec 08 - the CPI will clear 4%.

All the pressure looks like it's on the upside to me.

Well QE has done it's job - it's created the inflation it was supposed to - but was it the QE, or the falling sterling making up inflation?

Is the 2.9% figure 'real' or has it been tarnished with tax cuts and stimulus? How do we know anymore - it's not like the inflation figures were very accurate to start with. What about the January figure - will it be over-rated by the re-imposing of the VAT rate and the increase in prices this will bring?

Has anyone considered that the £1.15 a litre at the pumps might be the biggest contributer to the rate? (because very few goods do not involve fuel in the construction or transportation) - which is of course because of the fall in sterling, especially as the oil price is so low.

The longer it goes on - the worse it gets........and there are still people out there claiming this is nothing to worry about.

Around the Olympics everyone in the country will hear a deafening "I TOLD YOU SO" as the world wakes up to what writingsonthewall has been trying to tell you for so long.

Appearances can be deceptive - and deception is the name of the game for the state and it's media hussey.

I wonder if it is wise to invest any lump sum, one may have, at this precise moment in time? Will bank and building soc rates start to edge upwards?

Yippie! Inflation up, private sector wages down.

And guess whose wages are going up and whose final salary pensions are index-linked?

And guess who's paying for that?

Answer to first question is public sector employees including bbc as well as politicians.

And guess the answer to the second question?

12 swiss francs to the pounds in 1950. 1.69 now.

cheerio

#17 sounds like you are describing the end of last time Labour were in power (1977) - "Our rubbish here hasn't been collected in five weeks, the country is in terrible debt, strikes breaking out everywhere, the rest of the world laughing at us, inflation running wild..." - or is your memory failing you?

The ups and downs between then and the mess this Labour Gov have got us into now are insignificant by comparison

23. At 1:45pm on 19 Jan 2010, ghostofsichuan wrote:

"It appears that the "economy" is being defined by how well the banks are doing and as we can see they have a lot of excess money."

That's just it - MONEY, not wealth, or value, but worthless, paper money. The stimulus of QE did not produce any wealth, it merely diluted the wealth we did have.
...and the stupid bankers took that money and started gambling with it immediately, not considering where it came from or what it's purpose was. Now they claim there is nore 'wealth' to share around, namely bonuses - a move which seals their own doom.

The Economy is being ignored - look at these three stories and tell me there isn't the worst downturn in living memory...

CitiGroup turns in a loss (even though banking is supposedly back on it's feet and everyone was applauding the 'early return' of TARP money)
https://news.bbc.co.uk/1/hi/business/8467656.stm

Japan Airlines finally fail - costing investors millions and the Japanese Government even more.
https://news.bbc.co.uk/1/hi/business/8466997.stm

E-Clear finally goes bust (After taking down some airlines in the process)
https://news.bbc.co.uk/1/hi/scotland/8467751.stm

Portsmouth - the first premiership casualty?
https://news.bbc.co.uk/1/hi/business/8468078.stm

....nothing to see here.....move along folks....no recession to see.....just a 'credit crunch' and the possibility of a 'double dip' - AKA depression with some Government stimulus mid-way through.

I don't think that inflation will take as big a leap as some might think next month. I can't see all the retailers that dropped there prices from say £9.99 or £499.99 to £9.78 and £489.35 for a few weeks last year before putting them back up will be in a great rush to put there prices to £10.21 and £510.86. I could be wrong - if the pound is weakening it might go to £10.99 and £549.99. I think that in most retail areas the retailers just said thanks very much Darling that'll make my accounts look a lot better.

25. At 1:57pm on 19 Jan 2010, piquetb wrote:

"As Thatcher said - the trouble with socialist governments is that sooner or later they run out of other people's money. "

Well if we get one then maybe we can prove this fact - but as we haven't then this statement is pointless and no more accurate than 'all them foreigners take our jobs'

Still, I suppose it's short and easy to remember - which is why it's such a popular saying for people who have bad memories and can't retain long words.

You then go on to mislead everyone by forgetting that most of the debt (and certainly the extended part which is critical) was taken on because of the banks

Don't worry I know their taxes have not paid for half of the loan they have just had, and the interest they are charging us on that debt.

...there's one born every minute - you can't pin the massive public debt solely on your Thatcherite interpretation of socialism.

If you look at the graph (or any other like it) you will see the massive increase in public debt occurs in late 2007 - just as the credit crunch started - and then the real explosion in debt as the banks were taken over.

So the facts do not seem to support your political argument.

26. At 1:57pm on 19 Jan 2010, Operation Overlord wrote:

"New Labour are to be congratulated - they promised to be a "radical" Government - we did not realise at the time that that meant the destruction of the free market, the expansion of the big state & inter-generational debt lasting possibly 150 years."

Be fair - Labour didn't destroy the free market - it destroyed itself!

I don't recall Gordon changing the law so he could take over the banks, I seem to recall they started failing and he was forced to support them.
Big state and big debt were attached by the failure of the free market to a) regulate and b) allow itself to fail (because I don't remember any bankers suggesting we let Northern Rock, HBOS, RBS, B&B etc. fail at the time. (see post just above)

....or have you re-written history to exclude that fact?

31. At 2:19pm on 19 Jan 2010, Econoce

Is that the 'jealousy of Capitalism' coming out?

So the private sector fails (banking) - and the result is billions is lent by the taxpayer (at histroically low rates) in order to keep all the buffons in the city in work (including myself)

....but ther REAL problem is that public sector workers are getting index llinked pensions?

If you really think Switzerland is so good - why aren't you there?

Idle threats from someone who is clearly absolved themselves of any responsibility - private sector perhaps?
Oh once the problem was 'passed to Government' the good old private sector forgot all about it - instead wanted to tell us all how it's taxes are going to get us out of this mess (forgetting the amount of bailout well exceeds the taxes paid by the banks for the last 15 years)

I'd rather the gold plated pensions were kept by the Government employees - I mean it might be expensive, but it's miniscule compared to the giant black hole the private sector created in our finances!

35. Writings on the Wall

"You then go on to mislead everyone by forgetting that most of the debt (and certainly the extended part which is critical) was taken on because of the banks"

Old style - Bank of England is lender of last resort. Big responsibility. Quid pro quo - power and knowledge to ensure those who might call on this are worthy. New Labour - confused regulation allowed the banks to run free. I mean it wasn't a surprise to those who have seen the lending practices of the last decade that it all went Pete Tong - but we had to rely on an authority that wasn't empowered. Even without all the extra warnings - Liars Poker, Barings collapse. Just as we had to rely on their probity on the assurances that Saddam had WMD.

Its just crap and we need someone other than this lot in asap

38. At 2:55pm on 19 Jan 2010, piquetb

You have a funny recollection of history...

"Old style - Bank of England is lender of last resort. Big responsibility. Quid pro quo - power and knowledge to ensure those who might call on this are worthy."

- and who made the bank of England independent of politcal instruction (a favourite game of Thather's Government was to tinker with interest rates pre-election for a favourable Economic environment)

"New Labour - confused regulation allowed the banks to run free."

...which was a continuation of Conservative policy - have you never read the manifesto of the Tories and seen the phrase 'Economic Liberalism'?

"I mean it wasn't a surprise to those who have seen the lending practices of the last decade that it all went Pete Tong - but we had to rely on an authority that wasn't empowered."

...and what about 1990? Wasn't that recession caused by the same principle problem (lax lending)? - Don't you think it's time to find out what causes that lax lending rather than simply stopping at that convenient point?

"Its just crap and we need someone other than this lot in asap "


I totally agree - but the alternative is no better (and in fact worse) than the current bozo's in power. This is the reality of the situation.

We have dimwits running for Government - why? Well maybe you should ask the market that because it's constantly encouraging people into other disciplines than running the country through it's bizzarre wage setting - which as we have seen from the banking episode - is open to manipulation.

35 writingsonthewall

"you can't pin the massive public debt solely on your Thatcherite interpretation of socialism."

The problem with the NooLabour Government was from 2001 it started to overspend with a significant increase of 3/4% per year. If you look at the Government expenditure graphs in this link you can clearly see what happened and what is to come:
https://www.economicshelp.org/blog/uk-economy/uk-national-debt/

The way I would read government spending is nothing was left in reserve for a problem with the economy. So we were heading North quickly into debt before the step leap caused by bailing out banks. So when worthy Bloggers say "typical Socialist Governance" they're right. Remember the late 70's?

Keynes view was save when your in the good times so that you can bail out the bad times. Brown has done the opposite. Hopefully the electorate will do the right thing in May and kick him out.

"Eye popping 2.9% annual CPI".

Stephanie - the only thing eye popping, is your apparent belief that this is extra-ordinary. The average rate between 1980 and 1995 was 5.60%. Since 1995 it has of course been significantly below that sort of figure. But 2.9 is hardly anything to worry about given the factors which have caused the swing

"I seem to recall they started failing and he was forced to support them."

Forced? He decided to, for political advantage, just as he bailed out icelandic banks. The banks should have been left to fail, the market shoudl ahev been left to sort it out. Savers should have lost their money, investors should have lost theirs - tax payers should *not* have risked theirs. We'd have had a recession no doubt - so what, we have one anyway, and a deferred one still bubbling away - the toxic debt is still there - but our grandchildren would not be paying for it.

Brown's been a disaster, Cameron perhaps even worse.

What is really depressing is that with the worst government in history still in office, we're also saddled with the worst opposition. I wonder what it will take for th epeople of this country to get angry enough to take it back.

Interestingly, during the period when David Cameron was amongst the previous "Dead-Woods" Muppets of Back-Room Boys at the Treasury during the time when the hapless Norman Lamont was in charge, the UK Inflation Rate then rose to a whopping 17%, therefore is this current rise today in the Inflation Rate to 2.9% heading up the return of a Card-Board Cameron Conservative Government?

So we have had QE because of deflation. Now we have inflation but the Bank of England is still pondering if more QE is required. Are they waiting for a phone call from Downing Street, I ask myself?

So we have low interest rates, 0.5% base rate, because of deflation but now we have inflation reaching nearly 3%. So why doesn't the base rate increase so that the saver can continue saving?

We are being constantly told that recovery is here which the inflation would suggest, so why are interest rates being kept artficially low and QE kept in hand just in case?

Are we recovering or are we digging an even deeper hole?

I would opt for the deeper hole. I would remind the experts of Denis Healey's theory of holes; namely when in one stop digging. They haven't a clue what is going on so why bother pretending to be in control.

The real economy is slowly sinking, there is no recovery other than Christmas shopping, the pound sterling has dropped in value making food and fuel more expensive, the consumer is cutting back, the government is so deep in debt it hasn't got a clue how to rectify its situation and would rather not anyway, the bond markets are looking askance at our level of debt and there is every prospect of a run on the pound.

I am delighted to know that inflation is back for just a little while, Stephanie, no doubt it has to holiday somewhere, but you sound like those people who tell us we are all living longer as they cut back our pensions. I'm sorry but I just don't believe it.

As VAT rose on the 1st January 2010 back to 17.5% it had no impact on the CPI or RPI announced today for December 2009. I don't believe it is relevant to cite it as a reason for the higher than expected VAT increase during December 2009 which this article appears to do.

Whatever the reasons CPI/RPI have jumped so sharply in December 2009 it is not due to VAT which was reduced in December 2008 and stayed at 15% during December 2009.

However, given this its likely the January 2009 CPI/RPI announced in February 2010 will be higher still.

Interest rates at 0.5% and inflation almost 1% above target, something fundamentally wrong with interest rates me thinks as all the figures back up.

I don't understand why it is that when inflation falls below the BoE target its time to start printing money to increase the supply of cheap credit, and yet when inflation rises above the target we are told its no great problem and it will drop off the figures in due course. One of the main reasons we have ended up in the mess we are in relative to other countries is that here Mervyn King kept interest rates too low for to long, its obviously something he is addicted to and he has never really been held to account for it. For at least three years before the recession started people were warning that the BoE was ignoring the inflation building up in the economy, most people could see how much the cost of living was really rising by, even though we were being told that everything was fine. All this is leading to is people being 2.5 to 3.5 percent poorer this year than last. How is that going to stimulate the economy? Will people be able to put in for 3.5 percent pay rises I wonder? Ahhh no....after all that would be inflationary wouldn't it! By the way, why is it that thousands of bankers can get 50,000k bonuses on top of their salaries and thats NOT inflationary, yet if a bus driver or teacher wants a pay rise 0.5 above the rate of inflation then Mervyn King starts moaning about the state of the economy? The cost of living is on the rise again, and the average person on the average salery is going to find it even harder to keep going now....anyone out there feeling optimistic for the future?....anyone?

You have a funny recollection of history...

"Old style - Bank of England is lender of last resort. Big responsibility. Quid pro quo - power and
knowledge to ensure those who might call on this are worthy."

- and who made the bank of England independent of politcal instruction (a favourite game of Thather's
Government was to tinker with interest rates pre-election for a favourable Economic environment)

Not relevant - I'm talking about the Governor's power


"New Labour - confused regulation allowed the banks to run free."

...which was a continuation of Conservative policy - have you never read the manifesto of the Tories
and seen the phrase 'Economic Liberalism'?

No. Not interested in politics or economics. But either the BoE is the lender of last resort and is on watch duty or you let the market sort itself out ie let HBOS and RBS fail. You can't mix and match.

"I mean it wasn't a surprise to those who have seen the lending practices of the last decade that it all
went Pete Tong - but we had to rely on an authority that wasn't empowered."

...and what about 1990? Wasn't that recession caused by the same principle problem (lax lending)?

I don't think so. High interest rate, slow growth, the ERM failure, cost of the miners strike et al

Inflation, what inflation? Our Asda have just lowered the price of a tub of Pringles from 99p to 74p.

On a more serious note, I think people that have commented about hyperinflation are a bit off beam, as the QE money hasn't been dished out and spent (as cash), but helped the banking system improve their fictional/black hole balance sheets, and to keep the budget deficit from sinking the government.

The main inflationary problem with QE is the devaluing of Sterling, as we are a net importer. It must be possible to work out reasonably accurately what the 20% drop in Sterling has contributed to inflation, based on the percentage imported etc.

Now if QE does end, and the pound strengthens, which it has been doing for the last week, we will get a deflationary factor come into play.

So the massive question is whether the economy can stand on its own 2 feet once all the special measures are removed. Is the "life support machine" the only thing that is keeping the patient alive?

Using this analogy, I think the economy has some gangrenous feet that need amputating (public sector numbers, pay and pensions, and welfare benefit levels), but I'm not convinced that any political party is willing to face up to it.

Stephanie,

If you find 2.9 % (after the maximum of fiddles) "eye-popping" I fear you ain't seen nothing yet!

At the risk of being boring and repetitive even the much despised Mervyn King knows interest rates are far too low but he lacks the bottle to raise them as he knows he should have dome months ago. Sooner or later rates must rise to at least 5 or 6 percent - the longer this rise is delayed the higher the inflation will be and the more difficult it will be to get it under control and the higher interest rates will have to rise to for effective control of inflation.

My most depressing scenario is that he will not raise rates for a few months, but wait till the IMF imposes a huge rate increase and insists on his dismissal in the hope that he can salvage his huge pension fund. His interest rate policies supported by the Treasury (Nick Macpherson) magnified the bubble and are now recreating another entirely predictable bubble - absolute idiocy.

Who says the free market failed? Part of free market economics is that entities within it are allowed to succeed and fail. The free market was not allowed to exist post bank crisis because the Government (rightly or wrongly) refused to let businesses that failed go to the wall. If RBS/HBOS was declared legally bankrupt the government could have stepped in and guaranteed their obligations to other banks as an independant entity whilst avoiding any payroll/pensions liabilities, a much better solution for the tax payer and a free market outcome for RBS/HBOS.

Further to this the whole reason for us being in this mess can be more than partially put on the governments doorstep as well as the banks because they allowed a misrepresentitive inflation figure to be used to set interest rates. If house prices were included in the inflation figures interest rates would have risen much earlier and stopped the over borrowing which occurred. The BofE are not to blame as their mandate is simply balance growth and inflation with the figures the Gov supply them with. It is very important in the future that inflation is measured correctly or this can happen again. You wouldn't even need any regulation on lending if inflation was measured correctly as any increase in asset prices would result in an increase in interest rates thus stopping asset demand before price got too high, the market regulating itself. The government made a distorted market by ignoring the single biggest asset in the inflation basket (and I'm sure any other party would have made the same mistake, but lets admit the mistake and put it right so it doesn't happen again).

"the eye-popping 2.9% annual CPI inflation rate for December."

Why is it that Economics is called the dismal science because of the Economists inability to get anything right and yet we are supposed to accept the eye-popping 2.9% as accurate?

# 49 Jonearle

As I recall it QE was introduced in March 2009 - well after the fall in Sterling. In fact sterling was at 1.02 Euro in December 2008 - its lowest to date. It seems hard to argue that the current devaluation is a consequence of QE - which begs the question whether the QE fall is yet to come?

I too noticed that the pound strengthened today - which is intriguing as my simple grasp of these things suggests that higher than expected inflation is a bad thing. This begs the question what other information the market are acting on?

Any ideas?

#42 “Savers should have lost their money, investors should have lost theirs - tax payers should *not* have risked theirs.”

Actually the UK Government (as with the other governments) WAS forced to bail them out because quite simply it would have been much more costly to us (the Taxpayer) not to! If you look at the retails deposits & savings held by the four banks that were bailed out then they were much more than the value of the bail out which the government would have had to cover the overwhelming majority through the protection scheme.

I’d even be bold enough to say that if there had been time for a referendum on the subject based on the situation at the time (rather than our now distorted and emotional view) then the “Taxpayer” would probably have voted in favour of a bail out anyway.

The question goes something like this:

“Do you want us to take a stake in the banks for about £70B or would you prefer to (1) lose any investments to have in those banks (2) lose any savings you have in those banks (3) have to immediately repay any loan or credit card balance you have with those banks (4) have to immediately repay your mortgage or lose your home and (5) lose your job if the company you work for has a loan with any of those banks that it also can’t immediately pay back.?”

I’m guessing that many millions of people will have been affected by at least one of the consequences - I was affected by 1, 2 3, and possibly 5 but definitely not 4.

As a result, those many millions of people would almost certainly have voted in favour of a bail-out because the alternative if personal financial ruin and possibly bankruptcy would have been even less appealing. Given that Lloyds have about 2.7 million private shareholders, 15 million depositors and 8 million creditors then we’re already well on our way to 30% of the voting population on that one bank alone.

The only people who would have voted against a bank bail at the time would have been either (a) the very stupid who don’t understand how finances work or (b) the very, very lucky few who happened to put their money outside of the banking system e.g. a Building Society or (3) the very, very rich whose monetary assets are a very tiny fraction of their wealth.

So I’m sorry but although we might whine about it now the UK Government did the right thing at the time even if we don;t agree with it now!

49. At 3:40pm on 19 Jan 2010, jonearle wrote:
'QE money hasn't been dished out and spent (as cash), but helped the banking system improve their fictional/black hole balance sheets, and to keep the budget deficit from sinking the government'

Apologies to other bloggers who have discussed this point before:

In 2009 the only large net buyer of UK fixed interest gilts was the Bank of England.

The Maastricht Treaty Article 104(1) forbids Governments borrowing directly from central banks.

The Bank of England has so far spent 99% on gilts and only 1% commercial debt.

Quantitative Easing is a method funding Government without officially breaking the rules.

Robert Stheeman (The Chief Executive of the Debt Management Office) gave evidence to the Treasury Select Committee in early November 2009 and confirmed that they were cooperating with the Bank of England in the gilt market, but that when Q.E. stops, there could be a problem selling gilts.

Pimco, the world’s biggest bond house stated that it intends to be a net seller of UK gilts in 2010.

The projected deficit between tax receipts and Government spending in the tax year 2010 – 2011 is £200 billion.

Now given the above, how do you think the deficit is going to be funded?

QED

40. At 3:16pm on 19 Jan 2010, dontmakeawave wrote:

"The problem with the NooLabour Government was from 2001 it started to overspend with a significant increase of 3/4% per year. If you look at the Government expenditure graphs in this link you can clearly see what happened and what is to come:
https://www.economicshelp.org/blog/uk-economy/uk-national-debt/"

If you look at the graph you will see the pink spots are a 'projection' - if you concentrate on the actual numbers you will see that until 2007 although debt was rising, it was well below the 40% of GDP.

"The way I would read government spending is nothing was left in reserve for a problem with the economy. So we were heading North quickly into debt before the step leap caused by bailing out banks. So when worthy Bloggers say "typical Socialist Governance" they're right. Remember the late 70's?"

Hang on a minute - are you suggesting that the Government must keep back a large proportion of our taxes just in case the 'free market' fails? That doesn't sound socialist or liberal - it's just plain madness.
Surely you are pleading for 'smaller government' - how is that going to be possible when you expect them to run a 'free market insurance scheme'.
So you don't want Government to intefere with the business of making money - but you do want them to catch the failures when they fall??


"Keynes view was save when your in the good times so that you can bail out the bad times."

...that's because Keynes 'accepted' the contradictions of Capitalism and simply felt that it was acceptable for the public to foot the bill for private losses. Whilst this does solve 'a problem' it doesn't solve 'the problem' - it's like you taking out insurance for the garage door which keeps blowing and knocking out the lights on your car - if you fixed the garage door then you wouldn't need to keep getting insurance!

"Brown has done the opposite. Hopefully the electorate will do the right thing in May and kick him out."

...and replace him with someone who promotes 'less regulation' and 'free-er markets' - which will be very interesting when the next bank fails.

Will the Tories bailout - or stick to their values....?

42. At 3:18pm on 19 Jan 2010, FrankFisher wrote:

"Forced? He decided to, for political advantage, just as he bailed out icelandic banks. The banks should have been left to fail, the market shoudl ahev been left to sort it out."

Do you remember the queues around Northern Rock? - Have you watched Mary Poppins?

"Savers should have lost their money, investors should have lost theirs - tax payers should *not* have risked theirs."

I do agree with this - but savers would have lost their money - Northern Rock did not have enough to cover the savings and the financial compensation scheme might have been able to cover it for NR - but not for the rest that followed (and remember, a lot of the forced takeovers wouldn't have happened without Government sweetners)

"We'd have had a recession no doubt - so what, we have one anyway, and a deferred one still bubbling away - the toxic debt is still there - but our grandchildren would not be paying for it."

This is true - to a point. I don't disagree we (the ordinary) would not have been worse off if the banks had been allowed to fail - until the wealthy withdrew from the Economy and the vacumn of investment would have been filled with mass unemployment (and I mean more than 10%). I don't like the situation, but that is reality.

54. At 4:27pm on 19 Jan 2010, AgeTheGod wrote:
'So I’m sorry but although we might whine about it now the UK Government did the right thing at the time even if we don;t agree with it now!'


Well I don't agree that they did the right thing.

They should have put the banks into pre-packaged bankruptcy, protected retail deposits and let the money markets and investment banks whistle dixie.

Ultimately we would have written off up to £600 billion in foreign debt, which will sound like a mighty attractive propostion a year from now.

44. At 3:27pm on 19 Jan 2010, stanilic wrote:

"So we have had QE because of deflation. Now we have inflation but the Bank of England is still pondering if more QE is required. Are they waiting for a phone call from Downing Street, I ask myself?"

Do you know why?

...because deflation is damaging to the wealthy, but inflation is more damaging to the poor. That's why they are more scared of deflation and would rather risk Wiemar than United States 1929.

48. At 3:38pm on 19 Jan 2010, piquetb wrote:

"Not relevant - I'm talking about the Governor's power"

Would this be the powerful and in charge Governer who has to write to Government to explain the inflation figures? - of course it's relevent - just because the monkey says something, it doesn't mean the organ grinder isn't instructing him.

"No. Not interested in politics or economics. But either the BoE is the lender of last resort and is on watch duty or you let the market sort itself out ie let HBOS and RBS fail. You can't mix and match."

....not interested? - a) what are you doing on here and b) how can you not be interested in something which is about to chage your live totally?

"I don't think so. High interest rate, slow growth, the ERM failure, cost of the miners strike et al"

So you don't remember "no return to 5 times lending" - don't know about the MIRAS tax relief and the excess cash it produced allowing for 'property gambling' to begin?
You shoudl research better - miners had nothing to do with it and high interest rates and the slow growth were in response to the crash

The only difference the ERM made is we couldn't adjust our rates (as we are doing now)

I was there - so I do know, I don't know where you got your facts from - was it the monster raving loony manifesto?

49. At 3:40pm on 19 Jan 2010, jonearle wrote:

"On a more serious note, I think people that have commented about hyperinflation are a bit off beam, as the QE money hasn't been dished out and spent (as cash), but helped the banking system improve their fictional/black hole balance sheets, and to keep the budget deficit from sinking the government."

...which is being paid out to bankers as bonuses - which will be spent in shops - which is inflationary (because as you said it's fictional capital)

Have Asda really reduced the price of Pringles?

50. At 3:43pm on 19 Jan 2010, John_from_Hendon wrote:

"If you find 2.9 % (after the maximum of fiddles) "eye-popping" I fear you ain't seen nothing yet!"

I'm sure Stephanie has seen bigger figures in her time...

51. At 3:58pm on 19 Jan 2010, will wrote:

"Who says the free market failed? Part of free market economics is that entities within it are allowed to succeed and fail."

errr - the banks who came cap in hand to the Government pleading for bailout to prevent the queues going round the block?

....or are you saying it's not just a 'free market' but also a 'free society' where the collapse of which should simply be allowed based on the failures of the free market.

Do enlighten us - which institutions would have been able to stump up the £850 BILLION we have used to revive the Economy?

What would citi-groups losses be today without the bailout?

Would you still be keeping your money in the bank after you saw NR, B&B, Abbey National, Lloyds, HBOS, RBS etc all fail?

"If RBS/HBOS was declared legally bankrupt the government could have stepped in and guaranteed their obligations to other banks as an independant entity whilst avoiding any payroll/pensions liabilities, a much better solution for the tax payer and a free market outcome for RBS/HBOS."

...and how many deposits could the Government pay? Don't forget the actual value of the Economy is multiplied many times under FRB and the Government simply doesn't have enough.
As you should know, the whole systm hinges on not everyone asking for their cash at once - and there is nothing like a bank run to make that happen.

"You wouldn't even need any regulation on lending if inflation was measured correctly"
...and you can add GDP to that list - but how do you measure the rise in prices accurately - without having total control of them?
There are too many aspects which cannot be accounted for - loss leaders, cash in hand, non-financial trades etc.

I agree about the misleading inflation figures by removing house prices from it - but it's too easy to blame the 'rate setter'.

...just remember why the 'rate setter' was invented - ah yes another crash in 1907!

https://en.wikipedia.org/wiki/Federal_Reserve_System

If you can't find the problem - blame the solution eh?

56. At 4:40pm on 19 Jan 2010, writingsonthewall wrote:

"Hang on a minute - are you suggesting that the Government must keep back a large proportion of our taxes just in case the 'free market' fails? That doesn't sound socialist or liberal - it's just plain madness."

I'm not sure we are on the same planet. Of course not! Simply put the purpose of Government is to raise taxes to pay for Government spending and if possible to pay off National debt - yes? So if Mr "I saved the world" Brown had spent less of our money each year, the amount of tax raised would be less, Government expenditure would be less and we would not now need to borrow so much (It's called Thatcherite Economics). Nor would our overall debt be so big - simples not madness!

54. At 4:27pm on 19 Jan 2010, AgeTheGod

Very good - I like this bit, nice and clear for those who contest the argument.

“Do you want us to take a stake in the banks for about £70B or would you prefer to (1) lose any investments to have in those banks (2) lose any savings you have in those banks (3) have to immediately repay any loan or credit card balance you have with those banks (4) have to immediately repay your mortgage or lose your home and (5) lose your job if the company you work for has a loan with any of those banks that it also can’t immediately pay back.?”

Oh dear. You don't think that someone has worked out that the World is losing patience with our credit worthiness and that in preparation for an interest rate rise to prop up our croc of a currency thought it would be a good idea to push out this guff.

58. At 4:46pm on 19 Jan 2010, Dempster wrote:

"Well I don't agree that they did the right thing."

So tell me, which of the 3 choices in the paragraph preceding the opne you quoted best describes you:
(1) the very stupid who don’t understand how finances work or
(2) the very, very lucky few who happened to put their money outside of the banking system e.g. a Building Society or
(3) the very, very rich whose monetary assets are a very tiny fraction of their wealth.

Just wondered...

"They should have put the banks into pre-packaged bankruptcy, protected retail deposits and let the money markets and investment banks whistle dixie."

Unfortunately, your alternative suggestion looks superficially workable but would have required massive changes to the law (both domestic and international) in order to have been viable.

Then even if we, as a nation, had got away with screwing the rest of the woprld for £600B we would have, in turn, been screwed big time when it came to borrowing any more money to pay for things. That's impoprtant if you consider that virtually all international trade is based on credit and not cash i.e. you get the goods and then you pay for them. Becoming a cash buyer with a currency that nobody wants would be extremely painful.

Anyone who has ever had their credit rating destroyed by unmanageable debts and then needed to borrow money would already know this. It works the same way for countries as it does for people just on a much larger scale over a longer period of time.

Do you know you can't even ask a rhetorical question these days without WOTW trying to answer it.

Such energy.

Bless the boy. Keep it up!

Steph, I watched you on BBC News earlier and I thought you gave a clear, concise, measured, sober reaction to this inflation spike. I also agree with your statement : "this inconvenient jump in inflation will reverse itself in a few months". All these hysterical doom-mongers bleating for interest rate rises should heed your words. And they should also reflect on the certainty that after the election, when the inevitable deep public spending cuts and/or tax rises come in, we'll be looking at deflation again, not inflation. Caledonian Comment

#54 AgeTheGod. Mussolini defined fascism as "a merger of government and corporate power" - Which pretty much fits the description of the economy today. That makes your post a rambling (but factually inaccurate) defence of Fascism. Well done!!

According to you we needed to bail out the banks because it was the lowest cost option. What about when ceding to the demands of terrorists is the lowest cost option?

You have no basis at all to suppose that a referendum would have resulted in a popular vote to bail out banks. The nearest point of reference is the US where Congress initially declined to bail out US financial institutions. During the period of Congressional deliberation it is reliably reported that Senators were lobbied by something like 100:1 in favor of NOT passing bail out legislation.

It is true that direct Government invstment in banks is around GBP 70 billion (although it is not a question). It is also true that direct and indirect support to the finance sector aggregates at around GBP 1.3 trillion.

So perhaps the real question is what motivates you to pose questions constructed around manifestly false terms of reference?

So, all in all not a very edifying post either from the perspective of reason or morality. Let us hope you have simply made a mistake and are not part of the alleged new wave of cognitive infiltrators.

It's all very well saying that inflation has risen to 2.9% but more important I think is how much is actually being spent ?

Has the total spend increased or as I suspect, has it dropped through the floor ?


On the pringles front, the supermarket chain buys in pringles at about 50p per packet with a normal retail price of 99p. The supermarket has approached the makers of pringles and said 'we want to put your product on promotion, 25p off the retail price. You will pay us 25p for each packet we sell'.
The makers of pringles do not have to comply but they would soon find that shelf space for their products suddenly starts to disappear.

#67 AgeTheGod. Now we find you defending the current situation on the basis of the law.

Would this be the same law that David Milliband is so overlty contemptious of when someone dared to use the law to lawfully issue an arrest warrant for the former Israeli Foreign Minister.

Would this be the same law that has been treated as so much toilet paper to enable the suspension of normal acounting rules, the same law that is ignored so as to prevent any investigation into alleged fraud by leading global financial institutions.

Or perhaps it is the same law that enables people to expect to be taken seriously when they say that they have handed over $700 billion, but don´t know who they have given it to or to what uses it may have been put?

Ah yes the rule of law - Those were the days. But don´t worry the forces of global kleptocracy are on your side - There will be no return to the rule of law, I do hope you enjoy yourself in an ever more lawless world.

Evening Stephanie,
wow, inflation going up, I bet the Treasury/ Gov. are pleased!
Hard lines for the savers on fixed term rates though!
May I ask through your blog, who (which Nation/Business) is supplying the UK with money to pay for the Governments overspend each month?
What deals are being done here and what will be the consequences?
BTW it is said that the difference between results and consequences is that results are what we expect and consequences are what we get.

I saw the most bizarre episode on the BBC News Channel five o'clock news.

The inflation item was deemed not worth a mention until twenty-one minutes into it. Then at the end Gavin Esler asked Stephanie "Should we have a cheer for inflation?", Stephanie Replied with something along the lines of "Well we were worried about deflation" so Gavin said "Hurrar!".

Cheering for inflation during a recession, when people are suffering financial hardship, is just plain stupid and very insensitive.

#34 Is quite right to assume that the old practice of pricing just under the pound and just under the nearest 10 or hundred pounds will not change. So how much things go up as a consequence of the change in VAT should be very revealing of how much price pressure retailers are under.
Since its only a small percentage if retailers feel under a lot of price pressure they will hold prices and absorb the costs. If not they will grab margin. I would mention that the X-Box 360 arcade, which some suppliers had without games at £109 before christmas, seems to have risen to £119. If thats an indication retailers are fattening margins.

Why do Capital Economics always portray the downside and why are they quoted so often ? Is there a connection here ?

The Old Cynic.

The biggest reason for the price rise is that imported goods are a lot dearer now than they used to be thanks to the pound falling against other countries......but the pound is bouncing back up again as the economuy improves and inflation is seen as a harbinger of higher interest rates.
THE SECOND BIG REASON IS THAT PRICES WERE PUSHED HIGHER THIS CHRISTMAS AS A SIGN OF RECOVERY AS BUSINESSES IMPROVED THEIR PROFIT MARGINS.
EMPLOYERS HAVE FACED HIGHER EMPLOYER TAXES.
THE CAR SCRAPPAGE SCHEME ALSO STRANGELY RAISED CAR PRICES NOT INCLUDING SCRAPPAGE.
CAR TAXES HAVE ALSO INCREASED.
Mortgage arrangement fees are huge and traffic fines are bigger.
MUCH OF THE INFLATION IS DUE TO AN INCREASE IN PUBLIC-SECTOR CHARGES.
AND REDUCED COMPETITION IN THE TRAVEL INDUSTRY AND ON THE HIGH STREET HAS ALSO PUSHED UP PRICES.
As the economy has started to improve so the higher priced ticket items are flying off the shelf.
Mind you I think interest rates should stay put and prices will level off at about 2%.
We're gonna make it!

"Disappointed but not surprised" ???? How ridiculous - is economics supposed to be like betting on the horses at the local bookies, or is that just the version of economics that the BBC is paid to dish out to the unsophisticated?

First of all, we need to bear in mind that understatement of inflation is built into the figures, and particularly into CPI. The same thing happens in the US. Anyone interested in how weightings, 'substitution' and 'hedonics' are used to do this can check it out at ShadowStats or at Chris Martenson's Crash Course. Take 2007 - when food prices spiked and oil hit $147/b. Do you really believe that inflation that year was only 3.25%? Maybe it was, but only if you didn't travel, eat, or live in a house. The figures, to put it simply, are fiddled.

False inflation figures serve government in various ways, all of them insidious. They make people feel better. They flatter 'real' GDP growth. And they hold down 'inflation-related' increases in pensions, in benefits and in tax allowances. So understating inflation is win-win for governments.

So I'm not that fazed by small movements in an indicator that I don't trust anyway. The reality is that much higher inflation is coming. One reason is £200bn of QE (or, to give it its real name, 'printing money' - and please don't believe anyone who tells you that it's not the same thing). QE may even go beyond £200bn if government can't place its debt - QE has been about back-door monetisation of the deficit in defiance of Maastricht. And can you really believe that QE will ever really be reversed?

Then there's the deterioration in sterling. It's recovered somewhat of late, but don't be fooled by that.

Then there's the inevitability of increases in taxes and charges - these don't show up fully in CPI, but they'll have a big impact on 'real' inflation.

#53 TFoth As I recall it QE was introduced in March 2009 - well after the fall in Sterling.

That is true, but this was only part of the picture. From October 2008 the BofE started to reduced interest rates, i.e. making £s cheaper, therefore of less value. Once this got to practically zero they then continued with the QE programme, which is equivalent to negative interest rates. So its all been part of devaluing Sterling month by month. Because the USA and to a lesser extent the EU joined in, we were saved from further falls in the exchange rate.

#61 writingsonthewall

...which is being paid out to bankers as bonuses - which will be spent in shops - which is inflationary (because as you said it's fictional capital)

Have Asda really reduced the price of Pringles?

I agree a fair bit of the QE money leaks out and has been spent in an inflationary way, but in an environment verging on depression levels of deflation. So its not increased prices in absolute terms for many items. There are exceptions like house prices in some regions.

Personally I think not facing up to the necessity of deflation and keeping a burst debt bubble partially inflated will be seen as the big bad call made by the BofE. I'd love to know whether this was due to political pressure from the government to last out to the election, or really decided as the best course of action by Merv King and Co.

Think how cheap fast sports cars would have become without bankers keeping their bonuses! Seriously though, there will be many higher end suppliers of goods who will now be saved from going under as these bonuses are spent. Just crazy to think that some of this is my future taxes.

And yes, Pringles really are cheaper. Half way through the first of 3 packets!

We are getting there......even the Torygraph agrees with me now!

https://www.telegraph.co.uk/finance/economics/7021071/UK-to-grow-faster-than-other-major-economies.html

And even Morgan Stanley says the risk of a UK HMG credit rating crisis was seriously overplayed....

https://www.telegraph.co.uk/finance/economics/7021000/Neutral-interest-rate-may-be-2.5pc.html

Have they been reading onward-ho?

Still , a continuation of low interest rates will be just the ticket for a resumption of Brownian economic growth and stability.

Am I imagining it or is Spring in the Air?

Stephanie,
I agree with a comment above ( Francesca Jones) - exceptional uncertainty was the phrase used by the MPC to predict the outlook for inflation - VAT is now restored to 17.5% and talk of it increasing after the election. Can pay freezes hold? Will commodity prices spike upward? If the December 2008 fall in CPI was extraordinary, I see no reason to rule out a hardening of prices going forward with those surviving in business looking for better margins in a higher tax environment.

The late fictional Prime Minister, Jim Hacker, Once said "never believe anything until it is officially denied". Well, many of us who contribute to this blog have said that Quantatitive Easing is inflationary. The Bank of England, the Treasury and the Chancellor, as well as you Stephanie, all seem to be in denial. Therefore QE IS INFLATIONARY. How high has inflation got to go before you stop toeing the party line, Stephanie?

This inflation is not an inconvenient truth. It is a dire threat to our well being as a nation. Some time in the next few months, this truth will dawn on the Bank of England and they will have to put interest rates up. Obviously, being Gordon's placemen, they will not dream of doing it before an election, so things are going to get much much worse before someone "discovers" that "we have a problem". And yes, I am thinking of Apollo 13. We are all yelling that we have a problem and incredibly Houston is ignoring us - because it is the inconvenient truth you alluded to, Stephanie.

2.9% is merely a staging post on what will almost certainly be an increasing spiral towards 5 to 6% by the end of this year.

The "spin" put out today about this being a one off leap and expecting it to come down is hopeful in the extreme.

As several people have pointed out we will start to see the effect of VAT rising coming in from next month and it will have a continuing upward effect. Fuel prices have shot up again recently as have a number of other staple goods. Promotional prices of Pringles obviously excepted.

The benefit of falling interest rates will work its way out of the RPI figures in March so there is no good news there either.

Also as people perceive the recession to be ending the shops and suppliers will feel less desperate and won't be slashing prices as much as they did last year. They will no longer be able to hold down prices by keeping margins low.

Hold on its going to be a bumpy ride!

67. At 5:27pm on 19 Jan 2010, AgeTheGod

Good point, and I respond as follows:

I am am average self employed working Joe, husband and father of three, and my response is:

Firstly as regards the UK’s AAA rating:
The first is A is given because you pay back the capital.
The second A is given because you honour the interest payments
The third A is given because you don’t water down the value of the gilt by printing more money.

The third ‘A’ is likely long gone but not admitted to.


As regards our obligation to the rest of the world, I say this:

Firstly we have an obligation to our own people. We have that obligation because it is right to be so obliged to do the best we can by our own citizens.

Now based on the assumption that the difference between right and wrong within a nation is accepted, I further say:

The £600 billion that was borrowed by the banks from the money markets should be considered in the light of:

They are professionals nd presumably priced in the risk of default upon bankruptcy of the bank they had leant the money. And for the sake of argument, if they had not, they were clearly negligent.

All this apart, my reason for pre-packaged bankruptcy is this.

The current financial debt is depicted by both politicians and journalists in £’s.
One hundred billion pounds for example is not something that most people have ever dealt with, I being one.

If the cost of the financial mismanagement were detailed as the cost to society, then those being asked to bear this cost would be able to fully understand what was being asked of them.

For example:
The cost of the mismanagement of the finances of Banks and Government may in the years to come equate to:

1,000,000 destitute families, either by repossession of forced sale
5,000,000 young people/children whose lives are affected by destitution and/or poverty
15,000,000 people unable to get access to an NHS dentist
1,000,000 people unable to get life saving treatment from the NHS
10,000,000 living in poverty
1,000,000 people either bankrupt or insolvent
5,000,000 people out of work

In short the numbers that are required to pay for this financial mismanagement, and the price they are being asked to pay is rather high.

So when you say to me that not taking the option of pre-packaged bankruptcy of the various banks was a good idea, I respond that you the price that the average Joe and Jane has to pay is not one which I would foist upon them with impunity.

There is a difference between right and wrong.

And this difference is being clouded, muddied and avoided.

But sadly for many, there is a price which will have to be paid for our collective inability to see this difference.

Personally I don't think this is a blip, printing money, keynesiasim and low interest rates all are inflationery measures.

You reap what you sow and history shows that the way you get out of this mess is to balance the budgets. Other measures to solve this problem without balancing the budgets invariably lead to inflation.

I think we are going to regret the Bank of England's quantative easing policy.

#72. At 6:26pm on 19 Jan 2010, armagediontimes wrote:. “Now we find you defending the current situation on the basis of the law.”

I'm not defending the situation on the basis of the law – this implies that I condone the situation which is far from the truth!.

I'm just pointing out the consequences of not following the rules as they are currently laid out – whether we, as a society like, it or not we are still part of a much bigger "global economy" who have an established set of rules and if we want to play with that group then we have to play according to those rules. If we don’t then there are a defined set of penalties that can be imposed on us *whether we like it or not*.

Personally I've known since Junior School that the law is made to protect those that have something from those that don't and, as my dear old head-teacher use to say, “the only crime is getting caught” i.e. the only reason he could punish me for my behaviour was because he knew I knew I was deliberately breaking the rules because I didn;t agree with them and I regularly got caught doing it.

Unfortunately because they are “other people’s rules” we don’t get to easily change them so deliberately breaking them and following a strategy based on defaulting on debt or commercial liabilities at the national level would, quite rightly, invoke the know penalties with far worse consequences than paying off a mountain of debt.

Just talk to anyone who can’t get any form of high-street credit and needs cash for everything to see how difficult it becomes. I have some acquaintances who can’t even get a bank account let alone a credit card – they have to pay to cash cheques, pay for everything face-to-face with cash (no internet savings or finance deals) and “extraordinary needs” has to be carefully planned for.

That’s what happens when your credit rating is completely destroyed by upsetting the money-men.

I wish it wasn’t that way but it is and although it might seem appealing in the short-term it's definitely not a road I'd like to travel for the long-term.

87. At 9:07pm on 19 Jan 2010, AgeTheGod wrote:
'That’s what happens when your credit rating is completely destroyed by upsetting the money-men.
I wish it wasn’t that way but it is and although it might seem appealing in the short-term it's definitely not a road I'd like to travel for the long-term'


You leave the creation of money as debt in private hands, and you will be forever in debt to them.

You do a good post, don't stop.

This is nonsense.

Apart from the fact that the CPI measures don't include some things they should, are distorted by VAT, and are expressed as annual deltas, not truly reflecting things at all, the main thing is whether or not incomes are increasing or decreasing.

Economists like to talk about inflation and deflation but both come in many flavours. If the prevailing wind remains debt deflation, where earnings are lowering, debt clearance the increasingly main concern, and less being spent, then volume of money circulating is decreasing and there is a downward pressure on prices. On the other hand, while all that is going on, the Pound has gone down the toilet. Given that a lot of UK's products are based on imports, why haven't prices gone through the roof?

Those are two large forces: one killing earnings and employment, the other raising import costs, while prices float around in the middle nominally modified by VAT tinkering.

What a load of nonsense! It is clear that prices don't mean a damn thing in this context - the UK economy is tanking and prices won't tell us one jot about it.

I am an average working Joe, husband and father of three and say this:

It is clear that government regulation and banking has gone woefully wrong, it is clear that for many, destitution and misery, has, and will follow.

But what of the future?

If this system of debt slavery is allowed to continue, then the future for most of our children, will be as debt slaves.

Easter’s coming. On Good Friday, find a large old oak tree, nail an average working Joe to it, (and if you can't find anyone else, I volunteer), and write the national debt off.

Find a tree, find some nails, and let’s get on with it. And when it’s done, in God’s sweet mother earth create a state bank and some sensible economic criteria to go with it.

For the future of our children, say ‘NO TO DEBT SLAVERY’

These widely reported headline figures are mostly due to VAT changes, as you state. The ONS statistical bulletin gives details of CPI and RPI indices excluding indirect taxes. CPIY actually fell from 3.0% to 2.8% between Nov and Dec. RPIY increased from 3.5% to 3.8%.

So this is all a bit of a non-news story really...

85. At 9:04pm on 19 Jan 2010, Dempster wrote: “Good point, and I respond as follows: “

Dempster> “I am average self employed working Joe, husband and father of three…”

Coincidentally, so am I and the future of my children is something that gives me frequent headaches nowadays.

Dempster > “Firstly we have an obligation to our own people. We have that obligation because it is right to be so obliged to do the best we can by our own citizens. “

You won’t here any argument from me on this point though, as always with the best intentions, it seems we disagree on what was the best solution for the British society as a whole.

Dempster > They are professionals nd presumably priced in the risk of default upon bankruptcy of the bank they had leant the money. And for the sake of argument, if they had not, they were clearly negligent.

That I think is one of the problems with investment trading – the investment managers and instrument traders are just dealing with numbers rather than money e.g. a Forex trade is defined as a “quantity of currency X” exchanged for another “quantity of currency Y” and the exchange isn’t valued in monetary terms as we would expect it to be.

In addition although they do factor in risk of default the risk factor, much like insurance premiums are based on risk, is the result of an analysis of history and a probability analysis of given events occurring - pretty much all of the trading algorithms work the same way with very complex mathematical equations calculating differences in trends and the probability of certain outcomes occurring.

Unfortunately as with any probability model there is an absolute certainty that eventually the predicted outcome will be wrong - in Physics it’s the rule that all systems will eventually fail no matter how stable they are initially. Unfortunately it’s not known when that failure will occur or what the magnitude of failure will be. That’s a lesson the investment banks will have now learnt and I’d be very surprised if they haven’t adjusted their algorithms already. There will still be some probability of failure but it’ll be a different type of failure next time – I don’t think it’s negligence but simply an inability to foresee all possible futures and price them accordingly.

Dempster > “In short the numbers that are required to pay for this financial mismanagement, and the price they are being asked to pay is rather high.”
Dempster > So when you say to me that not taking the option of pre-packaged bankruptcy of the various banks was a good idea, I respond that you the price that the average Joe and Jane has to pay is not one which I would foist upon them with impunity.

I agree the cost is very, very high and almost beyond comprehension but I still think the overall cost is lower through the bail-out than it would have been if the banks - Lloyds, RBS and probably Barclays (who were bailed out by the Middle East) - had failed. Unfortunately it would probably take weeks of information gathering and analysis to definitely prove which approach would have been best which as I understand it, we didn’t have at the time.

Dempster > But sadly for many, there is a price which will have to be paid for our collective inability to see this difference.

Which brings us back to our children. I thought it was bad in the 1970’s when I was growing up but I’m thinking they will have it much worse.

90 Yes John Dempster, I see you are getting there. Unfortunately unlike the Aztecs who drugged their sacrifice victims, so at least it was quick and painless, in this modern caring age those being arbitarily nominated as the sacrifical lamb will not find it to be over quickly.

92. At 10:02pm on 19 Jan 2010, AgeTheGod wrote:
Which brings us back to our children. I thought it was bad in the 1970’s when I was growing up but I’m thinking they will have it much worse.

Likely so, but thanks for responding.

You and I are parents, the future of our children is our concern.

Tricky business being a parent, don't stop posting, you're neeeded.

62. At 4:59pm on 19 Jan 2010, writingsonthewall wrote:

"50. At 3:43pm on 19 Jan 2010, John_from_Hendon wrote:

"If you find 2.9 % (after the maximum of fiddles) "eye-popping" I fear you ain't seen nothing yet!"

I'm sure Stephanie has seen bigger figures in her time..."

I'm not so sure, memory is a strange thing for economists - they have a kind of blindness where they actually become to believe their own nostrums and nonsense. They believe that the past is a different country and the future is entirely new and has never happened before and all of the certainties of economic history are in some way invalid. (In other words, it is a truly crap science - proven by their abject failure to even understand the risks they were running having a bubble economy - I blame Harvard! Where non coincidentally, both Stephanie Flanders and Mervyn King went!)

The rot at the core of economics seem to emanate from Harvard - they seem to have lost their way in the 'education ' they have delivered to our men of economic power for they have been on both sides of the Atlantic singularly culpable in compounding the ill effects of economic policy but not showing any understanding of the necessary role of judiciously raising interest rates in managing the economy to prevent, and moderate, bubbles - where did Harvard go so wrong - we should both be told and find out. Or was is it that we have had the enormous misfortune to have a really poor set of economists from Harvard and Harvard was not at fault at all (improbable!). [Not my old alma mater as you might gather] But isn't it odd that both Ben Bernanke and Mervyn King were educated at Harvard and both seem to have been unable to understand the huge and inevitable economic risks in running bubble economies?

#87 AgeTheGod. You are correct in that there is a price to pay ahould you seek to protect yourself - but how could it ever be diferent?

The Argentinians chose to get of their collective knees and they have done OK. Even little Iceland is considering its position - notwithstanding G Browns branding of them as a terrorist nation.

If they can do it, then why can´t you?

There is too much negativism and defeatism. Man is more than money. Remember Shelley:

"Rise like Lions after slumber
In unvanquishable number,
Shake your chains to earth like dew
Which in sleep had fallen on you -
Ye are many - they are few"

Why should anyone be surprised that inflation is increasing at a time when sterling has fallen in value and massive quantitative easing has taken place?

Asset price inflation was a sympton of the last bubble and crash and it looks as though everything is falling into place for the creation of another asset price boom and bust on the back of quantitative easing. QE has led to a bubble in share prices (up 45%) and we can now see that house price inflation has returned. If we are to avoid another crash, we need interest rates to increase in order to deflate the asset price boom but the Govt need low interest rates to fund their debt.

It would have been far better if the Govt had simply nationalised the banks for what they were worth at the time of the crash (ie nothing) and then put in sufficient liquidity at a low cost to enable the (nationalised) banks to help British industry and commerce survive the recession. However all that happened is that the banks who were helped have taken the opportunity to enrich themselves at the expense of the real economy who paid for the bailout in the first place.

Surely the financial system has degenerated into complete farce! Not quite sure why the DOW was so happy today with pathetic figures from Citigroup on top of JP Morgan's last week both worse than analyst predictions and more to come this week..IBM..yawn..do me a favour John..and hang on..election day in Massachusetts..where the Dems may well lose an important seat (numerically speaking) in the Senate & weaken Obama's hand re health reform..probably the last thing he needs now..but wait..if the Dems do win the DOW will go up tomorrow as it means Obama's team is given popular backing but..if the Republicans win the DOW will still go up as it means the 'government of business' is fighting back in the US against the wishee washee Dems!!...and 2 weeks ago they were telling me UK interest rates were going to stay on hold until 2011..today the pound goes up as inflation hits 2.9% & speculators buy sterling as they think the government may have to raise interest rates soon to control inflation....mmm..let's face it the Bank of England never really could control a 'drinking session' in a brewery let alone much else..& hang on...what was that article today...the conclusion of the latest quarterly report from the Ernst & Young Item Club economic forecasting group. It warns UK economic growth will struggle to hit 1% this year. The consumer is completely cashed out - with consumer spending likely to increase by just 0.4% this year," said Professor Spencer. So the growth is going to come from hard earned export wins especially focusing on areas such as China...but hold on there…the pound is starting to go up again..so won't this hit UK exports??..so therefore is not 1% growth for 2010 a bit optimistic??.... Sorry fowks..it changes every day..smoke screens...lies....manipulated figures..& more & more....seems we are heading for a true tsunami in terms of economic downturn..& the governments are trying desperately to ‘con us’ into believing it ‘aint gonna happen’…well....the figures just don't add up guys….and then.. oh yes..the banks need to pay back what was lent to them….yes but hang on….if the little taxpayer did not bail them out they would not even be there now...profiting from a booming rise in equity prices contrived by the bail out funded by taxpayers money that has enabled them to do this...surely this 'contrived' 'you can't lose 'cos we'll bail you out' scenario at the expense of taxpayers means banking/financial 'speculators' should pay top premium interest on the profits they are making as..in this newly created bubble..it is only by the 'grace' of the taxpayer that those vermin still exist..they should be paying back the loans with 100% interest on top for the hardship these swine have caused some families ..how come people never mention this....but I am afraid we live in a world where financial greed and the 'Fat Cats' control...they have bought a breathing space but ultimately will fall victim to their own greed as we embrace another financial crisis very shortly probably even worse than the last one as Government's will need to say..sorry..there just ain't no more hand outs to you financial whizz kidzz..but..guess what?..it’s going to be me the ‘little guy’ that becomes the ‘fall guy’ as per….what a pathetic system we are slaves to...mmm..difficult times ahead...By the way.. I did sell those Barclays February 280 put options at a 60% profit-no cgt on traded options profits..prob is I've gone and bought £25k of March 300 puts when the flaming shares were 265..ooops...shows you how much I know...but thought for Wednesday..how come when GDP figures despite all their advanced ‘finger on the pulse’ economic monitoring techniques for the US and Japan seem to be woefully inaccurate and revised downwards we never hear a peep about those coming out of China……..

Re 97..Yeah busby2...you are 100% correct..!! Least there are some out there with brain...

Even as I read though these comments I realise that nearly everyone fails to understand what Inflation really is.
It is nothing to do with the cost of bread, mortgage repayments or petrol. Neither is it to do with public sector wage claims.
All these things are the direct result of Inflation. And who creates most of the Inflation in the UK economy - yes thats right, HM Government aided by the BoE.
Inflation is the pumping-up of the public finances with borrowed money.
If Inflation was as most people imagine then how on earth can an increase in VAT do anything but take buying power away and enrich the public coffers.
This latest round of Inflation is far greater then a meer 2.9%.
Take the total amount borrowed in 2009 and express it as a percentage of the Governments total spend. That is the Inflation rate and nowhere is the cost of any commodity mentioned.
This Inflation that is thrust upon us is and will continue to devalue Sterling. Then we will see more rises in THE COST OF LIVING. Inflation and the Cost of Living are not the same thing but are linked by dependancy.
Politicians, blog editors and commentators all get it wrong and I fail to see why.
If you would like further discussion please send your thoughts to [Personal details removed by Moderator].