July Inflation down to only 1.9%

[DimPrawn]

From Money Week:

The dive in consumer price index inflation saw City pundits suddenly pushing back their expectations of an interest rate hike. But if we look at the inflation figures in a bit more detail, they are less reassuring than you might think.

The main drivers were falls in food, energy, petrol and furniture prices. Like it or not, all of these are temporary impacts. The price of furniture fell sharply, after rising sharply last month - that’s just a standard summer sales tactic, to jack up the price of items just before they go on sale, so that they look even cheaper. So that’s a one-off.

And with oil and food prices rising more generally - and with the impact of the floods on food supplies still set to be felt later this year - food and petrol price deflation can’t be expected to continue, and it also seems unlikely that household energy bills will continue to fall.

The other point of concern is that clothing and footwear had the biggest upward effect on inflation, despite the summer sales. Cheaper clothes, due to a great extent to the impact of cheap Chinese imports, have been a major deflationary force in recent years.

Yet, there’s more and more evidence that this may be coming to an end. China’s inflation rate has soared to 5.6%, well above the government’s 3% target. As the Chinese demand higher wages and their own living costs rise, it will become more expensive to produce goods there.

There’s also the small issue of currency translation. As traders speculate that the Bank of England will no longer have to hike interest rates as rapidly - if at all - the pound has fallen below the $2 mark. A weaker currency drives up the price of imports, driving inflation higher - so a stronger yuan, combined with domestic inflation, could really drive up the costs of Chinese goods for UK consumers.

On top of all this, the Bank did point out in its recent inflation report that inflation could fall sharply in the latter half of this year. Even acknowledging that, it still indicated that at least another interest rate rise was needed to stay on top of things.

And we all know what happened the last time the Bank lost its nerve during a rate-hiking cycle. When the Monetary Policy Committee voted to cut rates by a quarter point in August 2005 (against the better judgement of governor Mervyn King), it introduced the notion of the “MPC put”. This, like the “Greenspan put” in the US, was the idea that at the slightest tremour in the housing or stock markets, the central banks would race to the rescue with rate reductions.

That move undermined the Bank’s inflation-fighting credibility and is now widely seen as a mistake - something which we argued all along.

The last thing the Bank will want to do now is to repeat that mistake at the first sign of a blip in the economy. We’d still be betting on the next move being a rate hike, rather than a cut.

[wendigo100]

And they exclude mortgage paymants also. So the recent interest rates hike do not show up.

That is true, which makes the inflation rate not very good for comparing your outgoings.

However, you can't include mortgage payments because, the way bank rates depend on inflation these days, we'd get caught in a spiral. The bank rate goes up, so mortgage payments go up, so inflation goes up, so bank rates need to go up again, etc.

[dang65]

I'm sure I read somewhere ages ago that this effect happens on a regular cycle:

1. The price of sofas is included in the inflation shopping list.

2. The sofa retailers put their prices up for a few weeks in between sales, thus sending inflation through the roof.

3. The sofa retailers massively reduce the previously inflated prices - "50% OFF!" - thus sending inflation plummeting. Everyone sighs with relief after the earlier panic.

4. Five years later, someone finally pays off the loan they got for a new sofa.

[BoredBloke]

And they exclude mortgage paymants also. So the recent interest rates hike do not show up.

[Mailman]

What do they count when it comes to deciding what inflation is? Clearly they dont include things like council taxes do they!

Mailman

[BoredBloke]

It's amazing how the rate falls by simply excluding those items which are on the increase.

[DimPrawn]

Yep.

Who would imagine it would drop sharply like that to a tad below the governments target? Amazing, New Labour's ability to control the economy like that..

Of course, now inflation is below target, who knows, perhaps a cut in interest rates is on the cards, and house prices will again double next year.

The moral of the story? Buy more BTL's whilst they are so cheap.

Boomed!

[NoddY]

...yes of course it is dear.


http://news.bbc.co.uk/1/hi/business/6945557.stm