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

    Comment number 298.

    Same old same old. Inflation goes UP and politicians/Bank of England blame the global economy/world recession etc etc. Inflation goes DOWN and they claim it's due to their wonderful management of the economy.

  • rate this

    Comment number 297.

    Living in France I find all these huge hikes in Electricity in the UK very confusing. In 2006 I was paying EDF 7.65 cents per Kwh. In late 2010 I was paying 8.17 cents per Kwh. That is an increase of nearly 7% over four years or so. Why does the UK have to suffer so much ? Perhaps electricity should never have been privatised !

  • rate this

    Comment number 296.

    Dollars then or £s or Marks or even marcs by the barrel. But not ouzo.

    Anyway, I'm from the provinces but even here I thought any free Euros in Greece had long since fled. If they're buying real estate in London wow they must be desperate. Maybe Hendon I suppose.

    Other anyway, surely Greece IS a dry husk

    Final anyway: Didn't you just start the rumor and surely no-one actually reads this?

  • rate this

    Comment number 295.

    294. krisbeeb "250 000 whats to sort out the Euro JfH - Drachmas?"

    Your really are daft! The slightest rumour of this and all Greece's Euros will be out of the country in Euroland and all Greek assets sold abroad. Money has no borders within the EU.

    Already there are wealthy Greeks buying bolt holes in London according to some estate agents. Greece would be a dry husk & that would cure nothing.

  • rate this

    Comment number 294.

    But Charles 289 I still have two problems with this:

    1. It is borrowed.
    2. It does not exist, anyway, so is ghost or magic money.

    and so much is being spent into the public and quasi public (supply and CCTed contracts) sector anyway.

    This MMT sounds like govt by decree or dictatorship. I thought we'd left that behind.


Comments 5 of 298



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