Tuesday 19 June 2012

"UK economy requires emergency cash injections to reverse fall in inflation"

Bob E has read between the lines of an article in The Independent:

The UK economy may have to adopt a more aggressive routine monthly injection of cash from next month after figures today showed a surprise drop in inflation. Falling petrol prices meant the Consumer Price Index (CPI) rate of inflation dropped to 2.8% in May, down from 3% in April and to the lowest level since November 2009. City analysts expect that without intervention the rate may remain unchanged or move below the currently recognised "danger level" of 2%.

Inflation has already fallen from 5.2% since last September and with further declines predicted, the Bank of England is expected to beef up its quantitative easing (QE) programme, which currently stands at only £325 billion following the, in hindsight, rash decision in February by members of the Monetary Policy Committee to suspend the £50 billion a month structured interventions.

Exhibiting his customary prescience, Governor Sir Mervyn King's gave a strong hint that more and more regular QE was needed during his annual Mansion House speech last week. Analysts said it looked likely that the necessary action would nevertheless have to wait until July 5, when the committee concludes its next two-day meeting.

Vicky Redwood, UK economist at Capital Economics, said: "Mervyn King has already hinted strongly that more quantitative easing will soon be forthcoming and these worrying figures today should ensure members vote to renew the programme at the upcoming meeting"...

The waning impact of the VAT hike at the start of 2011 and falling energy, food and commodity prices have also contributed to the problem. Last month, inflation moved to within 1% of the Government's 2% minimum rate, meaning Sir Mervyn had to send a fulsome private letter of explanation to the Chancellor.

A Treasury spokesman today said: "Inflation is now open letter territory. For the second month in a row the rate has fallen, provoking dismay."

In further evidence that some retailers may have been foolhardily cutting prices to draw in customers, overall food and drink prices rose by just 0.3%, compared with the better levels of 1.3% achieved last year.

The ONS said this 0.3% was also driven by declines in the price of fruit, particularly grapes, bananas, peaches and nectarines. The price of vegetables, mineral waters, soft drinks and juices also fell. Consideration is being given to attaching special import duties on these goods to address the problem.

4 comments:

neil craig said...

Satire aside government may well be quietly keen on inflation. It allows them to reduce pay without having to actually cut anything.

Mark Wadsworth said...

NC, it's not satire. It is quite clear that the Homeys in charge would love a bit of inflation to wipe out the assets of savers and the debts of leveraged land speculators, thus resulting in another massive transfer of wealth from the productive economy to the landowners.

James James said...

What I don't understand is why my building society (mostly financed by deposits) is willing to lend to me at below inflation?

Do they think inflation will be below my rate for most of the life of my mortgage? Are they being lent printed money by the government? Are their depositors idiots willing to accept below inflation interest, so the building society just takes its spread and doesn't care?

Or something else?

I do wonder why depositors are so willing to get shafted. It's easy to move your money around and get just enough interest to beat inflation; are most people that thick/lazy?

Mark Wadsworth said...

JJ: " the building society just takes its spread and doesn't care?"

That's the short answer. The long answer is a bit more complicated.

Banks are a cartel which collects rent from mortgage borrowers. They know there is an upper limit as to what they can squeeze out of them without triggering a house price crash, so that's a fixed upper figure; they then knock off 2% or so for their profit margin (they charge rent for collecting rent) and whatever's left goes to depositors.