Wednesday, 21 April 2010

Inflation numbers: Are the MPC all asleep?

So yesterday we had March's inflation numbers...

The UK inflation rate rose sharply to 3.4% in March from 3% the month before, official figures have shown. The rise in the Consumer Prices Index (CPI) inflation rate was greater than analysts had expected. Retail Prices Index (RPI) inflation, which includes housing costs, also rose sharply to 4.4% in March from 3.7%. (Link)
CPI 3.4%! That's rather bad, to put it mildly.

Here's how it happened. The MPC has kept interest rates too low for too long. As a result sterling has lost 25% of its value against other world currencies over the last three years including the US dollar, and is still falling. Thus oil has become very expensive for us and this cost feeds through into everything: petrol is £1.20 a litre, as you would expect, but the transport cost of food has pushed up grocery prices as well. In fact most goods have a transport cost.

Now a low sterling could be good for the UK economy. It could make our exports cheaper for foreigners and maybe even flip our balance of payments into the black. But only if we don't have inflation! If we have inflation our exports get cheaper due to a low sterling but then the gain is lost due to them getting more expensive due to inflation. So, pain but no gain!

The BoE's MPC seems to be convinced the real problem is deflation. A year ago they were issuing statements that they didn't expect CPI inflation to go above 2% until 2012 - and now it's 3.4%!

Do we actually pay these people?

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