Twin peaks: inflation 2008 and 2011

 
Bank of England building Should the Bank of England be doing more to tackle high inflation?

People keep saying it feels like the dark days of the financial crisis three years ago.

Well, in one respect, it is exactly like those times. Inflation now stands at 5.2%.

There has only been one other month when the CPI rate reached that level: September 2008. In fact, CPI was only introduced in 1997.

You have to go back to 1991 to find the broader RPI measure at a higher level than the 5.6% we have seen reported on Tuesday.

When that 2008 figure came out, the betting in the City was that inflation would fall rapidly - the average forecast was for inflation of 2.1% in 2009.

In the end, inflation was even lower than that. By September 2009 it had fallen to just 1.1%.

Today, the city economists are again betting that inflation will fall sharply. Both they and the Bank of England expect September to be the peak.

The average prediction for inflation in 2012 is now 2.5%, less than half of the latest figure.

Painful news

Unfortunately, they expect inflation to fall for the same reason it fell after 2008 - because of weakening demand in the UK and broader global economy. (The other bit of news we had on Tuesday was that even the mighty Chinese economy has been slowing down).

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Overall growth in GDP has not been the problem - it's the composition that has been lousy. ”

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As many have pointed out, this is a good month for inflation to peak if you are reliant on state benefits. And it's a very bad month for it to happen if you're the chancellor, once again forced to uprate benefits in line with a record high inflation rate.

But if you're mainly dependent on savings income this is painful news. The figures show the cost of fuel and light, for example, have risen by nearly 19% in the past year.

Do these numbers alter the case for more quantitative easing? The governor of the Bank of England would say no; policy must be set with a view to the future, which monetary policy can hope to affect, not past prices which have already occurred.

But, as we heard on the Today programme on Tuesday morning (0750), there are plenty of critics who would see the 5.2% inflation rate as further damning evidence that the Bank of England has run away from its job.

In my recent interview with Governor Mervyn King, he insisted that "allowing" this inflation to occur had been the lesser of two evils: had the bank sought to avoid it, the economy would have slipped back into recession and everyone - including pensioners and savers - would have been worse off.

In the Bank's view of the world, the single greatest threat for a highly indebted economy, coming out of a major financial crisis, is deflation - falling prices - which can push you into a downward spiral, like Japan.

Measured by that standard, the Bank's Monetary Policy Committee has been remarkably successful.

In cash terms, our national income, or GDP, rose by 8.4% between the second quarter of 2009 and the same period this year. That's the same as America, and a lot more than the eurozone economies, who grew by 5.9% in nominal terms over the same two years.

The cash value of the Japanese economy has actually shrunk in that period, by 2.3%.

But when you strip out inflation, only Japan has grown more slowly than the UK since 2009: we have seen just 2.8% growth in real GDP since the second quarter of 2009, compared to 5% for the US and 3.8% for the eurozone.

Overall growth in GDP has not been the problem - it's the composition that has been lousy.

Squeezed incomes

The Bank would say that's not its problem. It's the crisis - and rising commodity prices and VAT - that has caused the squeeze in real incomes and growth. Pushing down inflation artificially would only have made that squeeze more painful.

But some, like Richard Jeffrey at Cazenove, think the causation runs at least partly the other way; growth has been slow, because incomes are being squeezed and households have less and less to spend.

Spending by households was actually 9% higher, in cash terms, in the second quarter of 2011 than at the low point of the recession. But in real terms, spending has barely risen at all - the level of spending is just 0.1% higher than in 2009.

The argument over the Bank of England's strategy will not end here - but the relentless rise in inflation should. If the gloomy trends continue the prospects for inflation could look starkly different in a year's time.

 
Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this
    +18

    Comment number 18.

    Inflation 5.2% (even on the debased fake cpi figure) MUST equal FIRE Mervyn King.

    This shows that the whole financial, economic & monetary policy of the British Establishment is a fraud! They wrote the Bank of England Act which committed the state to the 2% policy & to raise interest rates to get to this figure. They haven't done so for 2 years. No excuses the Establishment MUST now Act.

  • rate this
    0

    Comment number 17.

    The BOE and other economists are clueless about inflation levels in 12 to 24 months time. Their previous record proves it. Much depends on energy prices particularly oil for transport. I believe the world can only grow supply by 1 - 2% from where it is now and at a very high cost and in 3 years time won't be able to maintain current output. With rising BRIC and OPEC consumption = inflation > 2.5%.

  • rate this
    +8

    Comment number 16.

    Until this country returns to serious manufacturing of material goods that the World wants to buy - and exports those goods to that World - I, for one, cannot see how things can ever really recover and thus return the U.K to a financially stable state. Look at China, as an example of this. They can do it - so can we (albeit theoretically). The Gov't. must take the lead to encourage this growth.

  • rate this
    +23

    Comment number 15.

    I was struck by King's comment in a recent interview when he suggested that inflation had nothing to do with anything he had done (like QE) and everything to do with rising fuel and food prices. But hang on: if QE is designed to force down the value of the pound, surely that will increase the cost of fuel and food, most of which we have to buy from other countries with that devalued currency?

  • rate this
    +7

    Comment number 14.

    The bank of england and government loves a bit of inflation because it inflates away the debt!

  • rate this
    +16

    Comment number 13.

    Like 2008 but now we have less money to spend as there has been about 15% inflation since then and we have had near zero pay rises. People can't afford to rent but can live in massively priced houses and afford to pay the mortgage. The BoE is slowly dragging the country into the mud making everything less affordable with its high inflation low interest rate policy.

  • rate this
    +21

    Comment number 12.

    This is simply away of paying off the hugh debt the country has. I am old enough to remember the inflation of the 70's and guess what happend then? High inflation because we were had a hugh debt, it is basically away of devaluing the pound without actually saying it. Who gets hurt by this? Yes thats right you and me, god help you if you live off your savings!

  • rate this
    +5

    Comment number 11.

    Amazing. Inflation, the great and awful Black Dog of ecomics is suddenly the good guy. Whether it is better than recession is debatable; what is not is that thanks to shockingly bad policies from all areas, these are the two choices we are left with.

  • rate this
    +10

    Comment number 10.

    I heard a bank apologist on radio this morning saying that the MPC were not failing to control inflation because the only "type" of inflation they care about is wage infaltion. In other words, they don't care about rising costs for the man on the street provided the corporations they protect don't have to pay fair wages to compensate. So now you know who's side Mervyn et al are really on.

  • rate this
    +22

    Comment number 9.

    How am I expected to keep on contributing to bank bonuses when CPI is this high and my wages are not moving at all!!!

  • rate this
    +20

    Comment number 8.

    I have a policy recommendation.As the role of the Monetary Policy Committee has changed and expanded more than could have been forecast when it was introduced back in 1997 there now needs to be new checks and balances on its power. My suggestion for a change is that MPC members should stand for election as they are currently much more powerful than many of our elected representatives.

  • rate this
    +11

    Comment number 7.

    BoE print more money, currency weakens, inflation increases, economy slows, BoE prints yet more money, currency weakens further, inflation increases further, economy slows further, BoE raise interest rates, economy crumbles. Interest rates will have to go up at some point and then this giant house of cards will come toppling down. Oh joy...

  • rate this
    +11

    Comment number 6.

    People call for the bank to do something - but what? Raising interest rates raises the pound and kills what tiny flicker of life there is in the economy. It does NOT change the fact the price of oil has fallen 20% in 6 months and the price of petrol has gone up more than 10%. Nor that the supermarkets are paying less for milk and bread ut putting the price up. The BofE can't stop cartels

  • rate this
    +29

    Comment number 5.

    The predicted inflation "for the next year is 2..%". They've been saying that for several years now and the BoE has been a good few % underestimated.

    Given that the growth is guesstimated the same way
    we've been in recession for several years now.
    Fantasy economics doesn't work. I'd join the demos if I could afford to.

  • rate this
    +8

    Comment number 4.

    The quality of BofE forecasting leaves a lot to be desired; my opinion now is that "honest bankers" (especially Central Bankers) are about as common as "honest burglars". The have to go - quickly!

  • rate this
    +5

    Comment number 3.

    "The average prediction for inflation in 2012 is now 2.5%, less than half of the latest figure."

    Let's hope they are correct.

    More to the point, and if any predictions are to have any credibility, what were the predictions for now six months or a year ago?

    Adam Posen: overshooting the target has not damaged the central banks’ credibility.

    Yeah right....

  • rate this
    +37

    Comment number 2.

    Errmmm... we are still in the finacial crisis.. it never went away and it never will until those in power stop thinking they can solve it by shuffling bits of paper about within the confines of a system that no longer works and needs a fundamental upgrade fit for the 21st century with a global population of 7 billion whom all want to consume like Americans.

    stop fiddling while rome burns pls SF

  • rate this
    +64

    Comment number 1.

    If they stripped out the prices relating to consumer goods (e.g. TVs, PCs etc), and concentrated on food, electricity, gas, public transport costs and petrol ( i.e. pretty much essential spending ) then the figure would be even higher.

    So maybe we need a new measure of inflation that just measures essential spending? Then we’d see what the true rate of inflation really is.

 

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