BRITAIN'S inflation figures released this morning—the lowest since November 2009—kill off the idea inflation is its biggest problem. The consumer price index dropped to 2.4% in June, down from 2.8% in May. The retail price index, which includes housing costs, was 2.8% in June, down from 3.1% in May.
These are closer to the Bank of England's target of 2%. The main reasons for the drop seem to be the muggy weather, which put a drag on demand for meat and summer clothes sales, and falling oil prices, which hit petrol prices. Clothing, food and transport costs comprise much of the downwards effects. More importantly, there seems to be little inflationary pressure in the wider economy. It is further evidence of a fall in global demand.
Yesterday the IMF revised its figures for British GDP down again, predicting GDP to grow by 0.2% this year (it predicted 0.8% growth only in April). It confirms what Brits should have been worrying about for the last year: zero growth, not out-of-control inflation.
Yet there was a large rightwing contingent that feared the latter. "Inflation - the cost of living - is the number one issue in Britain today," announced the Spectator in April 2011. "Inflation, not jobs, will be the killer of 2011," its editor Fraser Nelson said in February 2011. Its leader in January 2011 looks a little ridiculous now: "Inflation is back with a vengeance...Britain is once again in an inflationary cycle...For how much longer can high inflation be described as a blip?"
Ultimately Britain may have to deal with the higher prices if it wants higher growth. If Mervyn King had listened to these voices last year, and tightened the Bank's belt to return to 2% inflation, this would have hurt growth more. A loose monetary policy is needed to offset the impact of fiscal austerity. If the Bank can manage a monetary policy that works—one that actually makes banks lend and gets money moving back round the system—that should halt a worrying decline in inflation. These falling figures are a cause to fret, not celebrate.
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Inflation in the UK in 2011 (all items, annualized):
4.0% 4.4% 4.0% 4.5% 4.5% 4.2% 4.4% 4.5% 5.2% 5.0% 4.8% 4.2%
Unemployment in the UK in 2011:
7.8% 7.7% 7.7% 7.8% 7.9% 8.0% 8.1% 8.3% 8.3% 8.3% 8.3% 8.3%
If the Phillips-curve correlation is strong near the zero bound (as some claim), we would expect the burst of higher-than-expectation inflation to drive down the unemployment rate. What we see instead is the opposite: high inflation is leading to the drop in employment.
Consumers will react to higher prices by switching from domestically produced goods to cheaper, made-in-China imports. One doesn't have to be a genius to understand that.
Fraser Nelson makes economic howlers day and night, but didn't the OBR place the blame on Britain's weak growth in 2011 on high (imported) inflation?
Ah, the continuous campaign to inflate our problems away... we get it: you believe in the tooth fairy. Can you please drop it for a while?
BTW, 2.4% is still above the target - as has been the case every month since late 2009 (almost 3 years). So asking "For how much longer can high inflation be described as a blip?" is not that stupid.
Muggy weather puts a damper (sorry) on the sale of... meat? Why?
Barbecues
-- was the reason the ONS statistician gave me
Makes sense. Thanks for the explanation.
** sighs **
This again? Cool - you want to inflate your way out of the problem, go for it. Have Parliament change the mandate to inflation targeting at whatever rate you think is proper. Wrong IMO to do that without taking the overt, political decision - that's what it is, isn't it - a political decision?