How many more times can UK inflation be a ‘surprise’?

14th August 2012

The July figures are used for determining rail fare increases in England and Scotland in January. And unlike benefits which are uprated by the usually lower Consumer Price Index rail fares go up by the Retail Price Index. Plus there is an addition for (supposed) improvements to the system which amounts to 3% in England and 1% in Scotland. Put another way we have a fairly solid example of what I have labelled institutionalised inflation in the UK.

Inflationary Pressure is not dead

The oil price has been rising again in recent times and is now just above US $114 per barrel of Brent crude. If we look back to when this rebirth of the oil price rally began we see something that according to conventional economic theory should not have taken place as it began in mid June and has been accompanied by economic weakening rather than strength. However it has and the price of oil is up 17% since the beginning of July and is now 6% higher than it was this time last year.

Also there is price pressure from the rise in some food prices due to the weather which has brough  drought in the US corn belt and rain to UK wheat production. In an example of buy the rumour and sell the fact a disappointing USDA crop report on Friday has led to the price of a bushel of corn dipping below US $8 but that is still some 12% up on a year ago and 37% higher than at the beginning of June.

Some want to "pump it up" even more

An ex member of the UK Monetary Policy Committee David Blanchflower has written this in the Independent:

"It is blindingly apparent that the MPC should have done much more monetary stimulus a while ago, including unconventional asset purchases, as suggested by my old friend Adam Posen."

Indeed in what is unlikely to be a coincidence of timing Adam Posen has been interviewed by the Financial Times. And it will be no surprise to readers of this blog that he is calling for "More, more more":

"I have no question in my mind that what we're doing with QE is preventing things from getting much worse, but that doesn't mean you couldn't have an additional or better instrument."

Of course readers of the Evening Standard might be wondering if there are two Adam Posen's as in April he gave them the quote below on the way to telling them that no more Quantitative Easing was needed:

"Right now the committee has done the right thing."

And he went on to tell us that the extra £125 billion of QE that was voted for:

"should make a meaningful difference to the outlook"

Unfortunately for Adam's crystal ball the economy has continued to weaken and has not only shrunk for three quarters in a row but the latest figure was -0.7%. I doubt that was the meaningful figure he had in mind! I would imagine that Russell Lynch who conducted the interview is hoping also that he does not get reminded of his description of Adam Posen:

"Bank's ‘fireman' who quelled the flames of crisis"

Continue reading…


More on Mindful Money:

What has driven the slowdown in Japan?

'Clueless' Bank of England urged to do more

UK posts largest trade deficit in 15 years

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