Stagflation is the primary feature of the UK economy

The fundamental economic problem faced by the UK in the credit crunch era has been stagflation where the initial fall in economic output has been followed by an anaemic recovery combined with above target inflation. If we look at UK Gross Domestic Product we see that a number based at 100 in 2009 struggled to 103.2 at the end of the third quarter of 2012 and that was after the Olympics boost in that quarter  which meant 0.9% growth was recorded in it alone. By comparison if we look at the official measure of inflation (Consumer Price Inflation or CPI) we see that over the same period it rose from 107.5 in 2009 to 123.5 at the end of the third quarter of 2012 for a rise of just under 15%. When the Governor of the Bank of England talked of “rebalancing” the UK economy I hope that he did not mean towards inflation and away from economic growth! Unfortunately that is what actually occurred.

How are we doing now?

Last week we received production figures which sadly showed further signs of trouble.

Production on a seasonally adjusted basis fell by 2.4% in November 2012 compared with November 2011.

Manufacturing on a seasonally adjusted basis fell by 2.1% in November 2012 compared with November 2011

So disappointing numbers and they were in spite of the fact that a recent drag on output had reversed.

the extraction of oil & gas, which increased by 11.3%,mainly due to a rise in crude oil production in November when compared with October

So we were spared “summer maintenance” going into winter as well as my financial lexicon at least! But the underlying picture for industrial production is expressed by it being 97.3 on a series based in 2009 at 100. So stagflation here has been replaced by actual falls in output,which is not quite the way we wanted to exit it.

Gross Domestic Product

In another example of Shakespeare’s sorrows come not in single spies but battalions the latest report from the NIESR (National Institute for Economic and Social Research) showed a fall as well.

Our monthly estimates of GDP suggest that output declined by 0.3 per cent in the three months ending in December after growth of 0.1 per cent in the three months ending in November 2012.

This meant that on their figures we flat-lined in 2012 as a whole.

These estimates suggest a growth rate of 0.0 per cent in 2012

And the future is not exactly bright either according to them.

We do not expect output to pass its peak in early 2008 until 2014.

Business Surveys

Lloyds Bank has produced a business survey this morning for England which tells us this.

The latest reading of 50.1 in December is down from 51.0 in November, but remains just above the 50.0 no-change mark, indicating that there is still slow business activity growth across the country.

This also has a sadly depressing influence as the average for 2012 was 52.3. Also we saw this.

Input cost inflation picked up in majority of English regions

Interestingly Scotland and particularly Wales were doing better than this.

The overall purchasing managers report for manufacturing was hopeful at 51.4 in December but was then rather crunched by the much larger services sector reporting 48.9 or a contraction. The troubled construction sector rumbled on in its apparent decline recording 48.7.

What about UK inflation?

The Office for National Statistics has updated us this morning on this subject.

The Consumer Prices Index (CPI) annual inflation stands at 2.7% in December 2012, unchanged for the third month in a row

The Retail Prices Index (RPI – see background note 1) annual inflation stands at 3.1% in December 2012, up from 3.0% in November

Whilst I am reminded of why they wanted to “improve” the RPI by these numbers (for newer readers in my financial lexicon such “improvements” are called reductions although the reductions are in the measure and not reality) I am pleased that they failed as it continues to be nearer to what individuals feel inflation actually is when surveyed compared to the official measure.

The monthly figures for RPI and CPI were also quite strong.

The CPI rose by 0.5% between November and December 2012

The RPI numbers were hidden away in the far reaches of this report but also showed a 0.5% monthly rise.

The main reason for the rise this month drops nicely into my theme of institutional inflation  in the UK as the main driver was gas and electricity price rises. The timing of Christmas this year also flattered the numbers as it impacts on air fares so we may have an upwards influence on January’s numbers from this. As air fares are a choice to a large degree and utility prices an essential I expect all those who told us that tuition fee rises should not be taken much note of to be reversing course this month although I am not holding my breath! After all many of them have inflation is falling fast and will fall further boasts from earlier in 2012  to reshuffle into oblivion too. After all from August UK monthly inflation has gone, 0.5%,0.4%,0.5%,0.2% and now 0.5% as “falling fast” enters my financial lexicon.

If we move to the underlying numbers we see that CPI is now at 125 where 2005=100 and if we consider our economic performance since then it is simply too high. Also when you read that it has been at 2.7% for three months in a row please do not forget that this means that the index has risen from 124.2 to 125 over this period.

Expectations of inflation

The Bank of England conducted a survey of what people though inflation was back in November and concluded it was 4.4%.This has been reinforced by a survey conducted by Markit which shows that over 2012 inflationary expectations for the year ahead have risen.

Real wages continue to fall

We are due an update on wages growth later this month but as of now the position is shown below.

Total pay (including bonuses) rose by 1.8 per cent compared with August to October 2011

So whichever of our annual inflation rates you use (2.7% and 3.1%) we see that real wages continue their fall and so they continue to be a downwards influence on the UK economy.


The inflation outlook for the UK economy continues to disappoint and it has now been over its official target for 37 months in a row. We do not have an official growth target but if we did sadly it would have been below target for a lot more than 37 months. Perhaps such a reality is behind the flurry of forecasts of a fall and in some cases collapse in the value of the pound sterling. Although the 2007/08 depreciation gave us yes you’ve guessed it higher inflation and disappointing economic growth! So a solution to our economic morass is unlikely to be found in that direction.

As I review the prospects for 2013 I see that we continue to have a monetary stimulus in the UK economy from low base rates, £375 billion of Quantitative Easing and the Funding for Lending Scheme. But I fear that much of this will yet again seep its way into price rises and inflation will continue to be out of phase with the underlying economy.

Quite near to me is something which seems to me to illustrate the situation quite well as I tweeted yesterday.

On one side of Battersea Park we have £6million flats selling like hot cakes on the other we close the adventure playground for children


This entry was posted in GDP, General Economics, Growth, Inflation, Quantitative Easing and Extraordinary Monetary Measures, Stagflation, UK Inflation Prospects and Issues and tagged , , , . Bookmark the permalink.
Subscribe Find an Adviser
  • DaveS

    Yes, sadly the great rebalancing isn’t going to happen – devaluation isn’t going to work in a globalised world.

    You can’t compete on labour costs for low end manufacturing. Increasingly we will struggle to compete on high end manufacturing as the Chinese move up the value chain, just as the Japanese did. Our top engineering courses are full of Chinese students who will make this happen – unless we believe the myth that the Chinese are only good at copying.

    With North Sea production dropping it would be a miracle if we could get growth from industrial production.

    We have collapsing retailers, no surprise with falling real incomes and debt. We have the City under assault from US and Europe, the main UK banks are BoE zombies and there are increasing job losses as foreign investment banking slowly pulls out of London and heads east. With a stagnant housing market and stagnant public spending the service sector is not looking likely to grow.

    In short, the BoE economists have no idea how to create growth. But they do know how to create inflation.


  • jan

    I agree we have institutionalised inflation in the UK. I was very sceptical when Mervyn King was talking about deflation being a worry some time back.
    I wonder why we no longer get figures for the balance of payments (ie exports v imports) which we used to get monthly years ago? Maybe it’s just too frightening…..

  • JW

    Hi Shaun
    Sometimes these monthly/annual figures confuse the picture. As you put right by quoting the underlying indices. If you plot RPI or CPI over say 20/30 years you see the real trend. 2008 is a mere blip in a continuing trend upwards, because of compounding is increasing in ‘acceleration’. Deflation is a figment of the imagination, we are in a world of inflation.

  • max

    but at least we sell off all our land to foreign non-residents to balance the books!!!! Shame there is nowhere left for us in London any more and
    nobody in power gives a damn!

  • Rods

    Hi Shaun,

    An excellent summary of where the UK is and where it is going. 2013 Stagflation at best with further falling living standards.

    The most onerous carbon trading scheme in the world starts in the UK in April. This will drive offshore at an accelerating rate during 2013 much energy intensive heavy industry. I think the US will probably be the biggest beneficiaries of this with their low gas prices. This will probably include all oil refining capacity, where it is a very low margin, high energy industry. For every one step forward the UK seems to take three back. Higher unemployment from this is not going to help the deficit reduction or imports our balance of payments.

    I’m not sure what to make of the DT article yesterday on the latest OCED report it all seemed much too bullish to me, particularly where they say the worst is over in the Eurozone, but with Germany now in recession with a 0.5% drop in the last quarter and the outlook with even more austerity due in in a fair proportion of Eurozone countries in 2013 I can’t see where their optimism is coming from?

  • forbin

    hello DaveS,

    depressing isn’t it? and as we need lower house prices as well – well if we do then the banks need more bailout money ….. actually have we stopped bailing them out or not already?

    And as for British Industry isn’t it like the car one ? all owned by foreign investors ….. profits go abroad to be taxed in the least expensive place….

    As Shaun will agree , a few billionaires purchasing 5 million pound Battersea homes do not and economy make….


  • Anonymous

    Hi JW

    I found the period post the RPI consultation result intriguing as so many media outlets simply parroted the press release. So views like mine which won appatently did so in a vacuum! What it tells me is that there is enormous pressure to downgrade measures of inflation right now which all other things being equal means that they can claim that there is more growth. So I expect the story to run and run.

    For those wondering about inflation over time well the RPI was rebased at 100 in 1987 and is now 246.8. And if you do the maths and go back to the 1974 rebasing it would now be 973.6 if it still existed!

  • Anonymous

    Hi Rods
    Thanks for the link but what an odd article! So the OECD leading indicators suggest the UK is doing well but the OECD has also cut it growth forecast for the UK whilst they were turning upwards! So an each way bet.
    Also if the OECD leading indicators are as good as claimed then the OECD with its poor track record could do itself a lot of good by following them…..

  • Anonymous

    Hi Jan
    We do still get monthly trade figures. On such a basis they are very unreliable but I think that the lack of publicity for more is as much to do that they vary between poor and very poor.

  • Robert S


    I was quite surprised to read in the DT & the BBC that inflation was 2.7%. As I read these during the day, I thought to myself that the figures seemed low, but thought nothing more of it, until i read your article tonight where you’ve clarified that I was being quoted the CPI, not the RPI! The great conspiracy continues! Thank you for quoting both.


  • Andrew Baldwin

    Dear Shaun:

    You write: “it [the RPI] continues to be nearer to what individuals feel inflation actually is when surveyed compared to the official measure.”

    The ONS briefing note says that the RPI inflation rate rose from November to December even though the CPI inflation rate was unchanged mainly because of the housing component: the mortgage interest component added 0.04 percentage points to the RPI and housing depreciation, estate agent fees and ground rent together add another 0.04 percentage points. These are all legitimate components of household living costs, so British people quite reasonably think that the RPI better represents their living costs.

    Of course, the CPI was not designed to be a cost-of-living index, but an inflation indicator for the Bank of England. Including a mortgage interest index in such an indicator is just goofy, so this wedge between the two indexes is never going to go away. A CPI with an owner-occupied housing component based on a net acquisitions approach, however, would have components for estate agent fees and ground rent. It would also have a house purchase component similar to the RPI housing depreciation component. Such an indicator would probably be much better received by the general public than the current CPI, and rightly so.