17th July 2012
Today will bring the latest official inflation numbers for the UK and I wish to discuss the outlook for it. There are various factors which influence the rate of inflation we see. But we find ourselves in a situation where inflation has been above its targeted level of 2% for the Consumer Prices Index for some time now.
This has been particularly noticeable because the underlying performance of the UK economy has been so weak over the same period. These two combined events were one of the first themes of this blog and back in late 2009 I was something of an exception in predicting an inflationary episode for the UK. The peak was back last September when CPI reached 5.2% and this measure has been above its target since December 2009.
Paul Krugman does not agree
Some nuance is required here because he mostly writes about the US but last autumn Paul Krugman wrote saying that the UK was not suffering from an inflationary episode. Yesterday he hit on the same theme for the US and here is the title.
On The Curious Persistence Of Inflationary Obsession
Actually there is very little on inflation here apart from Paul's regular (and rather overused in my opinion) attempt to smear any opposition to him. Those with inflation worries are apparently afraid of.
Zimbabwe-style inflation just around the corner
I notice the use of the word "Obssession" to describe those with inflation concerns which sounds rather like "denier" in the climate change debate to me. I wonder how he would describe his own views! In fact the atmosphere feels rather like the one when those with inflation concerns in the UK were called " inflation nutters". By whom? one Mervyn King. You may not if you had read that back in 1997 be entirely surprised by the performance of inflation on his watch!
What are the latest numbers?
The more recent trend for inflation to head nearer to its target was reinforced by today's numbers.
The Consumer Prices Index (CPI) annual inflation stands at 2.4 per cent in June 2012
The Retail Prices Index (RPI) annual inflation stands at 2.8 per cent in June 2012
If we look into the detail for these numbers we see this.
The largest downward pressures to the change in CPI annual inflation between May and June came from clothing & footwear, transport and food & non-alcoholic beverages
Indeed we have seen actual price falls as well here as the underlying CPI index has fallen for the second month in a row. In April it was 122.9, in May 122.8 and in June 122.3 (2005=100). A similar pattern can be seen for the Retail Price Index or RPI which has gone 242.5,242.4 and then 241.8 over the same period (1987=100). It has been quite a while in the UK since one could write that prices have in fact fallen back.
UK Producer Price Inflation has improved too
The most recent recording for this number has shown an improvement too.
Output price ‘factory gate' annual inflation for all manufactured products rose 2.3 per cent in the year to June 2012, compared with a rise of 2.9 per cent in the year to May 2012.
Month on month the output price measure for all manufactured products fell 0.4 per cent between May and June.
So we can see that if we look at the production chain the situation is much better than we have become used to seeing and if we peer further down it we see this.
Input price annual inflation fell 2.3 per cent in June 2012, compared with no movement in the year to May 2012.
Month on month, the input price measure of UK manufacturers' materials and fuels fell 2.2 per cent between May and June.
Yes we are back in yesterday's land of negative numbers! And we can conclude that the starting point of the UK price chain will continue to help reduce inflationary pressure. Just to give you an idea of what a change this represents then last September annual input price inflation was 18%.
Shouldn't we be doing better than this?
This is a question of nuance but the UK economy has been performing poorly and if we look at the latest UK inflation report we see that if we measure our economic output at 100 in 2008 it is now just over 95 or as it puts it.
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