Inflation could be back sooner than you think
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Associate Editor
David Stevenson Feb 18, 2009
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What's going on with inflation?
When's deflation going to start, then?
Yesterday's official data showed Britain's inflation rate falling to a nine-month low in January. But the consumer price (CPI) measure was still up 3% on a year earlier. And although the CPI did drop 0.7% over the month, most economists were expecting a bigger slide of 1%.
Meanwhile, quite a number of prices seem to be creeping up again. Throw in the plunge in the pound, and it's starting to look like we may not actually see very much deflation after all.
It's easy to forget that despite all the talk about the UK heading for a period of falling prices, the country's headline inflation rate is still 3%. That's still well above the Bank of England’s official 2% target.
Of course, there's every chance that the year-on-year rate will soon slip back. CPI has been falling in each of the last four months, and some of the chunky rises in the first half of 2008 will soon be dropping out of the equation.
And BoE Governor Mervyn King anticipates inflation falling “well below” 2%. (And has been slashing interest rates accordingly). So it seems that consumer price rises are seen as yesterday's story.
Yet let’s look again.
Last month's 0.7% decline must be put into perspective. January is still the peak discount time for shops. Indeed, it's when inflation normally goes into reverse – last year also saw a 0.7% first month dip.
Price rises are building up
Furthermore, some future price rises are building up in the pipeline. There's been plenty of anecdotal evidence. Council tax, rail season tickets, London Oyster cards, cab fares – all have either been hiked this year or are about to rise. And The Telegraph notes that the nation's supermarkets are secretly shifting their prices higher behind a smokescreen of 'special offers'.
So which have we got: deflation or inflation?
If you can bear to plough through last week's Inflation Report, it appears that maybe the Governor's not too convinced that CPI is heading towards zero, after all.
Why's that? "The sharp depreciation of sterling may push up inflation more than the Committee expects". In other words, the Bank's analysts might have got it wrong.
The fall in the pound could bring back inflation
Within the last six months, the pound has plunged by more than 25% against a basket of the currencies of our major trading partners.
Simplistically, if the prices of foreign goods were anchored at the same level in 'local' terms, the average cost of our imports would have been pushed up by around a third. Clearly, it's not that straightforward, because complications like time lags and currency hedges mean that the full effects will take much longer to work their way through into UK prices. So the upshot is that we're only part of the way through the process. Import costs still have some way to go up.
And in the middle of all this, the Bank's about to start printing money. We look at what this means in this week's magazine (out on Friday), but at best, more cash in the system is hardly likely to push prices down.
The bottom line? Not only might Britain's consumer prices not fall as far as the optimists are forecasting, they could also be heading up again sooner than expected.
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David Stevenson
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