Tuesday, 18 February 2014

Inflation below target

Gosh! CPI inflation in January (2014) was 1.9% - down from 2.0% the previous month - that is below the Bank of England's target. Sadly RPI inflation rose from 2.7% in December to 2.8% in January, so you won't actually feel any better off. And neither your earnings or savings will be keeping up with inflation.

So the BoE's strategy is fully vindicated, now they have managed to get under target for the first time in four years.

No, not really. It is just a statistical anomaly. When people are feeling hard up they cut down on the non-essentials. For example they stop going to concerts and the theatre. Those are easy things to cut out of your life, unlike say, food, or housing. So the prices of tickets fall to try to fill the seats and the munchkins who compute inflation dully record the price cut as a fall in inflation.

To be fair, alcohol and tobacco are also down a bit (not really down, just rising less fast) and so are hotels.

Unfortunately the things you still have to buy when you're feeling the pinch, goods and services including insurance, gas and electricity, and most foods, are not falling at all.

1 comment:

Rob said...

Indeed. And of course, asset prices like housing and stocks have been rising - or at least refusing to fall as they should - which is one of the motivations of such an inflation policy. The major banks possess a lot of these assets and their derivatives, and the BoE doesn't want them to incur a loss. Furthermore, inflation results in a transfer of wealth from creditors to debtors, and all of the major banks and the government are in huge amounts of debt, hence the low rates and inflation combo. It's a continuous bank and government bailout. People see the value of their savings and earnings diminish, and it's all to maintain the solvency of the banks and the government. And whenever there is natural deflationary pressure, the BoE takes the opportunity to print more money to hit its inflation 'target', thereby depriving the people of the appreciation in their savings that they would have experienced and which they are owed due the inflationary period that preceded it. Thus we get inflation during the good times, and more of it during the bad times.

(Sorry for the essay; I got carried away.)