Will UK inflation ever return to its official target? Or do they not intend it to?

Today is the day that the UK updates on its inflation numbers. This has been a troubling series to say the least as inflation has exceeded its 2% official target on the Consumer Price Index for 38 months in a row now! This has made me somewhat sanguine about the media furore which has surrounded incoming Bank of England Governor Mark Carney’s use of the phrase “flexible inflation targeting” as after all that it what we have had for more than three years now. Also we may well note that there is an asymmetry here as there is plenty of “flexibility” in an upwards direction but panic should the inflation rate be expected to fall below its target. Indeed the “flexibility” was such that even when the CPI hit an annual rate of 5.2% or comfortably over double its target the Bank of England was engaging in more Quantitative Easing purchases designed according to its website to do this.

a further monetary stimulus to the economy

It is in many ways still hard to believe that they increased their planned QE operations by £75 billion in October 2011 just as inflation was so high. The “excuse” that it was in danger of falling below target has not gone well since has it? Also the objective of more economic growth has not gone well either as the UK economy has pretty much flat-lined.

The UK economy

We have ended up in the UK with a high level of inflation when you consider how poor our economic growth has been. Indeed the numbers are a critique of UK economic policies such as QE. Because if we give a policy starting in the summer of 2009 some time to bed in and say look at our performance in 2011 and 2012 we had inflation under the official measure of 7% and economic growth of just 0.5%. Perhaps that is what the current Governor of the Bank of England Mervyn King meant by the word “rebalancing”! I consider it to be a clear sign of policy failure.

Why? The problem that is real wages

As I have discussed many times in the past the overshoot of inflation has had a contractionary influence on the UK economy as it has exceeded wage growth meaning that in real terms wages have fallen. From the January review of the Office for National Statistics.

Over the past five years, real earnings have therefore fallen by more than 7 per cent.

And even they are now pointing out the inevitable consequence of this.

Rising prices relative to wage growth has a negative impact on household consumption as it reduces the physical quantity of goods and services that people can buy with the same level of income.

which means this is the consequence

The squeeze on household spending can be seen in the latest retail sales statistics. Sales volumes in December 2012 are a mere 1.4 per cent higher than they were in January 2008.

Problems for savers are mounting too

The way that the Bank of England’s Funding for Lending Scheme operates is that it offers the prospect of cheap funding for banks,which means that they have less incentive to compete for deposits and savings. If you look online the best rates have dropped from circa 3% to 2% which if you have to pay tax on it gets even thinner compared to the 2.7% CPI and 3.3% RPI.

So whilst the media cheers at lower mortgage rates for borrowers the effect of lower savings rates on savers who are consumers too gets forgotten too often in my view.

Today’s numbers

The Consumer Prices Index (CPI) annual inflation grew by 2.7% in January 2013, unchanged for the fourth month in a row.

Actually prices fell in January as the January sales had an impact and the underlying index fell from 125 to 124.4. The British Retail Consortium had suggested that retail inflation  on the high street had fallen in January. However food price inflation is still 4% according to  even them.

However in spite of the claims from vested interests I note that the Retail Price Index which I fought so hard to preserve unchanged tells us a somewhat different story.

The Retail Prices Index  annual inflation stands at 3.3% in January 2013, up from 3.1% in December.

It is obviously very upsetting for our authorities to have an inflation measure rising so they rush to tell us this about the RPI.

does not meet international standards

To which I would respond with.

The RPI is the most long standing measure of inflation in the UK

Since its inception in 1947 it has been doing the job. It is by  no means perfect but we do get perspective due to the length of the time it has been in use. Also “international standards” is defined in my financial lexicon as an attempt to mislead. Anyway it must have slipped their minds to point out that the Royal Statistical Society believes that there are problems with the CPI too.

The RPI stands at 245.8 in January 2013 based on January 1987= 100

Also the much maligned formula effect was only a small part of the difference between the gap between CPI and RPI this month which for the “experts” pushing for a change to RPI can use this twitter hashtag #backtothedrawingboard.

What can we expect next?

Producer Prices

Whilst output prices were reasonably stable in January we did see a push higher in input prices.

U.K. input prices surged 1.3 percent in January from the previous month

When we look why we see a familiar issue

 The monthly increase in raw- material costs was led by crude oil, which jumped 3.1 percent

What about now?

We see that the oil price has continued to rise in February. As I type this the price of a barrel of Brent Crude Oil is at US $118.14 which is up by over 6% in 2013 so far. So we see that price pressure remains here.

Also for UK consumers there is another problem which has been a declining pound. Back last November the Governor of the Bank of England Mervyn King called a rise in the pound’s exchange rate “unwelcome” in a broad hint that he would like it to fall. In 2013 he has got his wish as we have dipped to below US $1.56 today making a fall of just over 4% so far. In itself this may not sound much but add it to the rise in the oil price and we get to see why my brother asked me to explain why petrol prices rose on two occassions last week.

Here are the official numbers on this subject

On  Monday 11th February 2013, the price of ULSP (unleaded petrol) was 135.6p/litre, this is 1.2p/litre higher than the previous week.  The price for ULSD (diesel) was 143.0p/litre, this is 1.1p/litre higher than the previous week.

The price of ULSP is 0.7p/litre higher, with the price of ULSD 0.2p/litre higher than the equivalent week in 2012

In fact diesel prices are very near to the levels that caused a furore last year as the peak on this series was 144.36 pence. I have something of a vested interest as I have a diesel car but would be interested in readers thoughts about us being encouraged to buy diesels -more economical, save the planet etc- and then diesel pump prices surging relative to petrol ones!

If we move on from the oil price to other inputs into our economy we know that the falling pound will have an inflationary effect here too as most commodities remain priced in US dollars. Should we wish to buy anything in Euros the position is even worse,so that apparent staple of the UK food industry, imported horsemeat, must be getting rather expensive now!


We see a very familiar picture in the UK of inflation above target accompanied by trends which look likely to push it even higher. We do not know how far the oil price will rise or if the pound will continue to fall but we do know that these have happened so far this year. Institutionalised inflation will kick in too as the Eon energy price rise will affect next month figures and in the spring higher water charges will impact as well.

What bothers me is that these in charge of such polices of a falling pound and feeding in inflation must know that it is not working! So what is their true objective? My opinion is that the crucial number is real wage growth which is now running at an annual rate of -1.8% if you use the RPI and -1.2% if you use the CPI. This breaks the link that they might claim that debts are becoming more affordable, so to me official policy looks at best a shambles.




This entry was posted in General Economics, Income, Inflation, Interest rates, Oil, Quantitative Easing and Extraordinary Monetary Measures, Stagflation, UK Inflation Prospects and Issues and tagged , , , , . Bookmark the permalink.
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  • forbin

    hello shaun,

    by now even the wonks at the BoE have figured out they can’t control inflation – what with built in inflation providers and a failling , sorry falling , pound!

    typical response – move the goal posts!


  • Patrick


    No… no, you were right the first time.

  • Alex

    As I have posted before, we will get to the point of having a job and living on the streets for not being able to afford our bills AND food.

    At some point the effects of the monetary policy are going to manifest themselves and be seen in the real world. It looks like their invisibility cloak is loosing its power.

    I’m not sure now where I picked up the figure, but its £130 billion that has been wiped off the balance sheet for savers. This money is now missing from the economy, the spendable economy. While people rejoice at the lower interest rate charges the other side of the policy has been this amount, and these people can no longer derive a useful income. Apparently this level of income, 100′s of billion’s, is missing from Insurance companies income so they are turning to policy holders premiums to secure the missing income resulting in further price hikes at the purchasing end.

    In simple terms, a consumer lead economy is equal to wages, atleast the disposable part, and if your shrinking this, then you are shrinking the economy. Inflate away your disposable income is to inflate away the economy.

    If we stimulate growth, what are doing? Stimulating the purchasing of more stuff made in China or abroad, because we don’t make a lot of stuff here to consume.

    HMV and Blockbuster have gone to the wall, less people are wanting more of those plastic discs as DVD’s, and Netflix and others are filling these shoes. Perhaps DVD’s and CD’s sales index will be parallel of the consumer debt fueled economy, from 1990′s to 2013.

    But it doesn’t matter. With commodities priced in US$, our BoE populace are meddling around the periphery, as Fed Ben is QE to infinity, and I guess oil producers are asking themselves why should they take it?

    And so its back to politics as Iraq and Libya are now under the control of a barrel of a Drone, and Iran, the last of the, under current political arena, independent middle east oil producer, locked out of main stream trading arena due to sanctions, trades with the far east for barter. Perhaps this is Gold.

    The point of this being that America will enforce ts declining dollar with gun boat diplomacy, aka Drones in the sky rather than boats in the sea, but in Iran and the Straits of Homaz, they have both.

    And the end result will be war. If nothing else to justify why the economy collapsed and to hide the fact the economy disappeared in a puff of inflation.

  • Fergus

    Shaun, what do you make of Paul Krugman’s argument that at this point in the economic cycle we should be borrowing more to stimulate the economy? Are the BoE and the Treasury not simply colluding to finance the debt?

  • ernie

    I have mentioned this before, but I am more and more concerned that the unfolding of these events must inevitably lead to more extreme political positions in the short to medium term. Voters are suffering the policies of deliberate extra taxation by the stealthy means of QE (which nobody really understands so is easier than adding 3p in the pound to basic rate for example). Capital formation is being massacred by the savings rate policy. Debtors with over-priced assets and over-leveraged debts are being supported but only on life support as you correctly mention that real wages are falling. Real full-time employment is falling too – our own anecdotal knowledge shows this to be true rather than the official stats which are totally distorted, not least by part-time working hours.
    However, the previous government’s record was utterly catastrophic, and one cannot seriously believe any new Labour government would rectify any of the forementioned problems. Added to this, in my opinion almost everyone of any political persuasion is hostile to present immigration policy, indiscriminate welfare policies and the current version of the EU. It is notable that the only alternatives voters have to give them a hope of positive change are UKIP or the BNP. Although I could definitely support UKIP, I can see that the fragmentation of the major parties could lead to unforseeable dangers.
    Sorry about the long post, but I’m beyond the economics now since it seems to me too late to save our economy – it’s the future of our democracy I’m bothered about. A “benign dictatorship” is going to look more and more attractive to a lot of people before too long.

  • Justathought

    Hi Shaun,

    Looking through Bill Gross’s supernova metaphor, the answer to your intitule post is … in order to reduce/keep in “balance” the supernova’s velocity, “flexible inflation targeting” must be and will be implemented. How long this policy can last before the exponential velocity curve start? That is, I am afraid, the underlying question of your blog.

    Bond guru Bill Gross of Pimco warned on Thursday that the U.S. economy has become too credit-reliant and is requiring more and more government stimulus to produce ever-diminishing rates of growth, much like Japan has experienced over the past decade.

    Using a supernova as a metaphor for the U.S. financial system, Gross said the universe is expanding so rapidly now that in the far future it will end in a “big freeze.” Dependence on credit for growth will produce similar results, he said.

    “Our current monetary system seems to require perpetual expansion to maintain its existence,” Gross said in a Pimco investment outlook commentary for February posted on the firm’s web site. “The advancing entropy in the physical universe may in fact portend a similar decline of ‘energy’ and ‘heat’ within the credit markets.”

    Gross said in the 1980s it took $4 of new credit to generate $1 of real gross domestic product, while over the past decade it took $10 and since 2006, $20 to produce the same result.

    U.S. government, corporate, household and personal debt is now $56 trillion, a monster that needs ever increasing amounts of fuel, Gross said, calling it a “supernova star that expands and expands, yet, in the process begins to consume itself.”

    Gross runs the $285 billion Pimco Total Return Fund, the world’s largest bond fund.

  • Pavlaki

    You are right to point out the effect on savers and taking that to it’s logical conclusion; the grey pound. As a recently semi retired 60 yr old with many friends and acquaintances in a similar position, I can confirm that all are ‘pulling in their horns’ as far as discretionary spending is concerned due to inflation and the poor return on savings. These are the people who would, under normal circumstances, be buying new cars, furniture, eating out quite a lot and taking short breaks at hotels in the UK etc etc but who are now cutting back significantly to make up for the ‘relative’ hardships they encounter. I accept that by most standards they are very comfortable but they are still cutting back on the very expenditure our economy needs.
    The unintended consequences of FFL scheme?

  • Justathought

    Hi Pavlaki,
    As much I agreed with your statement we have to be realistic…. ” under normal circumstances” looking through History what we might consider normal is in fact abnormal…only 3/4 generations over the last 2000 years had enjoy privileges as some within our western societies are considering for granted!!!
    “While civilization has been improving our houses, it has not equally improved the men who are to inhabit them. It has created palaces, but it was not so easy to create noblemen and kings.”

    Henry David Thoreau

  • JW

    Just watched Posen on Bloomberg. He reckons 100% debt/GDP is the barrier, so US OK as it will level out in the 80%s. Last time I looked it was 103% and rising. Why do these guys get air time?
    Oh and he reckoned King thought he was right there should have been far more QE in UK but was scared of being seen to be outvoted. The only thing I agreed with him about was that Osbourne/Cameron are plonkers, no dispute there!

  • JW

    HI Shaun
    No and No.
    have a nice day!

  • Grumpy Old Paul

    Maybe the MPC should be tasked with increasing disposable real incomes with particular attention to earned income in order to address poverty trap. There are many ways by which this could be done:

    a) Desist with policy of weakening sterling exchange rate
    b) Freeze prices where government has direct control such as rail fares
    c) Use regulators to cap prices where possible such as water and energy
    d) Increase minimum wage
    e) Further increase personal tax allowances

    The Chancellor could then aim tax cuts (and benefit increases) at those with the greatest propensity to spend. Conversely, tax increases (and benefit cuts) could be aimed at those with the greatest propensity to save. These tax and benefit changes could be designed to be revenue neutral in their total combined effect.

    That should put the cat amongst the pigeons!

  • Alex

    did I miss something? Did we have a vote on bailing out the banks? Did I miss the vote for invading Iraq? Or did we skip that because Tony told us it was 45 minutes to weapons of mass destruction?

    We are already in a benign dictatorship, we label it democracy. We get to vote once every four years for someone who then does what ever they want, whether they promised us things or not. It doesn’t matter. Thats the beauty of the system,

    And then we go and bomb other countries on what are called humanitarian bombing missions that we don’t get to vote on, on the understanding that a humanitarian bomb blast isn’t as bad as a bomb blast and they should be grateful for it.

    This is what we take to the countries we are ‘liberating’ and bringing them democracy and freedom. Boots troops and check points and drones in the sky. Just look at the success we’ve had on running our own economy and you can be sure we can improve others.

    The previous governments record being utterly catastrophic is neither here nor there, If you look back in time it is all one boom and bust cycle after another with the deficit getting wider and the debt getting deeper.
    It doesn’t matter who is in power. Its two heads of a one party system.

    Until we have sound money, you can go on voting for who ever you want. As Lute from Aliens says ‘it won’t make any difference’.

  • Noo 2 Economics

    Hi Shaun,

    “but would be interested in readers thoughts about us being encouraged
    to buy diesels -more economical, save the planet etc- and then diesel
    pump prices surging relative to petrol ones!”

    Easy – I guess most people buy diesels now = law of supply and demand, in this case fairly inelastic demand and now they’ve got you. heh heh heh.

  • ernie

    Alex – you’re not wrong. I was really making the next step with a movement from the present kind of quasi-party democracy with all its faults as you pointed out, to one where the votes (yes even them!) go to a charismatic leader of the Adolf variety who then moves us to the real thing. Anyhow, despair does seem the theme of the day….

  • Justathought


    Over the last three years, I took a very hard look on societies, economics, business, psychology, philosophy, history, my own personal life … and even spirituality due to some circumstances.

    It might have been a very painful process however it was a huge blessing in disguise to des-hypnotising self from all unconscious and conscious believes (societal and personal) and to realise that I lived a lie was probably the hardest to bear. I consider myself extraordinary lucky for having woke up…

    Society as it, it’s scared and much of its people are desperate, everyone is trying to hold onto some illusions and no one wants to face the fact that… change is all about!

    We must recognise that through history, societies rose and failed, believes and paradigms are always changing. We are at a point within the human race of a phenomenal change… a very painful one indeed but I trust that it is worthwhile with the expectancy that at last the human race will really start to civilized itself!

    Actually I love watching what it is happening and sincerely would love that the unrevealing process would be faster.

    The first outcome of this actual mess will be the freedom to explore our own consciousness, to stop plundering our
    environment, stop producing waste but to live our life enjoying the interest of nature.

  • Anonymous

    Hi Fergus
    The problem with Paul Krugman is that he is in the “More,More,More” camp where extra borrowing will save us because it will generate economic growth. Where this falls down is of course we hit trouble because of too much borrowing in some areas! In essence he is also figuring that inflation will do much of the work for him but as I have described above in the UK inflation has had a contractionary effect via real wages.
    If we can find good projects that maybe some extra borrowing could be justified the trouble is that our leaders and bearaucrats tend to go for poor value vanity projects. I think that rather than throwing money at the problem we need to reform our banks and then have an audit of where we stand. It is better to have a choice than let inflation choose what happens I think.
    To answer you question yes they would in the end under PK’s plan and they might need too at the beginning as well!

  • Anonymous

    Hi JW

    If I may add there looks as though something sneaky has gone on here. Adam Posen may have been quoting todays report from the Congressional Budget Office but do you see the rub in it?

    “As a result, federal debt held by the public is projected to remain historically high relative to the size of the economy for the next decade. By 2023, if current laws remain in place, debt will equal 77 percent of GDP and be on an upward path, CBO projects (see figure below).”

    Ah held by the public so not including the bit held by the Fed and other government bodies trusts etc? That works with the numbers I have seen before! Later the CBO drops this so I wonder how carefully Adam Posen read it. Still whats US $4.8 trillion ….?

  • Anonymous

    Hi Paul
    When I applied to be a member of the MPC last autumn I made it clear that I would push for an anti-inflationary policy in the areas of b and c or what I labelled institutional inflation. That might have been enough for them to say no! But then my view on a has been expressed clearly too….
    As someone who feels that we should deal with the high marginal tax rates of the pverty trap I can outright support e which to be fair is happening under the coalition. It is a relatively inefficient move but it is a least overall doing some good.

  • Anonymous

    HI Noo2
    Well they have me anyway! Although I do relatively low mileage so it is contained to some extent for me but from my brothers position as a driving instructor for example all these price rises eat into his margins.

  • JW

    Hi Shaun
    Yes that is consistent with the PK-followers in the UK who maintain UK ratio is only 65%. ‘Cloud cuckoo land’ comes to mind. Its a ‘religious’ belief. And I forgot to mention Posen was also going on about global warming etc. Its like there are certain ‘beliefs’ which are badges of honour with these guys, and the more times they spout rubbish it will become the truth. The same is true of their ‘opponents’ politically , both extremes are as bad as each other.

  • Ian.Jones

    The market is showing what it thinks of the Bank of England, the pound is dropping like a stone. With idiots like Martin Wolf in the FT calling for helicopter money and a Canadian central banker who no doubt thinks the same it is only going one way for inflation. At least the rich get richer!

  • DaveS

    PK’s profile has been raised massively by the crisis and I suspect he is making a lot of money from it.

  • http://www.facebook.com/people/Andrew-Baldwin/100000294792043 Andrew Baldwin

    Dear Shaun:

    Thank you for your comparison of RPI and CPI inflation rates, where, as you note, the RPI is running much higher than the CPI.

    I don’t think one can say that one is good and the other bad. It was the genius (I don’t think the word is too strong) of the people who designed the HICPs to realize that central banks needed a consumer price series as target inflation indicator that looked quite different from the consumer price series (like the RPI) used for upratings. If it all ended in tears it was largely because the HICPs, including the ECB’S MUICP and the BoE’s CPI, never did incorporate the well-thought-out housing components that were planned for them from the beginning.

    The British Retail Price Index (RPI) is almost identical conceptually to the CPI All-items that Carney renewed as the target inflation indicator in November 2011, without even the hint of a caveat. Carney’s response to the TSC’s written questions makes no mention at all of the RPI, but endorses the UK CPI with a caveat about its exclusion of housing costs. If he is sincere in his endorsement, he has obviously undergone a huge change in views from what he thought not even a year ago, when he specifically criticized NGDP targeting in a NYC speech on February 24 because the GDP deflator, unlike the CPI All-items, takes a domestic approach rather than a national approach to measuring inflation. (The UK CPI, and all Eurostat HICPs, also take a domestic approach to measuring inflation.)

    From the beginning the designers of the HICPs regarded the exclusion of housing costs as a weakness, not a strength. They have consistently advocated a net acquisitions approach to calculating OOH in an expanded HICP, athough the roll-out of this series has been painfully slow. Carney shares the same muddled reactionary views as his mentor, David Dodge, on this subject and is clearly opposed to this approach. He makes no mention of Britain’s extensive work in producing OOH(NA) estimates from 2000 forward for Eurostat (it was one of the original five countries to work on pilot estimates) or that the UK will be one of at least 30 countries that will have to produce quarterly OOH(NA) estimates for Eurostat starting in September 2014. He may, in fact, be completely ignorant of these developments, which he should have closely followed.

    The TSC members should have grilled him on this, but they were negligent in the discharge of their duties. I sent all members a short paper called “On Governor Carney and the Inflation Targeting Regime at the Bank of Canada”. I received automated responses from three of the Conservative MPs: Mark Garnier, Andrea Leadsom and Brooks Newmark, and from two of the Labour MPs, John Mann and Teresa Pearce. (Ms Pearce was the only member of the TSC to make it onto Canadian TV. Our media have as much interest as a nine-year-old for discussions of monetary policy, but they covered her questioning Carney’s salary.) I suspect none of them bothered to read it or the TSC hearing might have been considerably livelier and more valuable than it was.

  • HarryA


    I would add. Most of the time this additional borrow and spend is inefficient and so does not increase total wages (employment) in the way forecasters would have you believe; whilst having a upward effect on inflation. The resultant fall in real wages causes unintended consequences by forcing people to save more, borrow and spend less.

    Public sector borrowing is cancelled out by private sector saving. Crowding out and net effect of zero.