Coffee House

Inflation at 4.2 per cent is nothing to cheer

17 January 2012

Are today’s inflation figures cause for celebration? The Consumer Price Index rose a mere 4.2 per cent in the year to December, down from 4.8 per cent in November. So, yes, a sharp drop
— but only a statistical boffin could describe this as good news. Sure, a similar drop can be expected when the VAT rise drops out of the comparison figures next month. But the prices
confronting British shoppers are still rising at twice the supposed inflation target, and will keep rising above this target for months to come. The following graph shows the trajectory we can
expect for CPI and RPI over the next few years:

The misery that inflation inflicts on the public is, of course, mitigated by pay rises. The two must be regarded together, and the fact that pay is failing to keep pace with inflation means the
nation is midway through the sharpest contraction in living standards in 80 years — which is certainly is nothing to boast about. The below chart shows how the Office for Budget
Responsibility sees inflation and pay in the years ahead:

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For as long as prices are rising faster than salaries, and standards of living are falling, the British public are becoming poorer. Whatever else the government is doing, people are becoming worse
off. To raise a cheer midway through this appalling process, as some in the Westminster Village are doing, could be seen as grossly insensitive. 

And let’s look at the least fashionable topic of all, the real value of housing:

Homeowners are seeing the value of their net assets decimated by British inflation, still the worst in Western Europe. And the process is ongoing. Pensioners feel the same pain and ordinary workers
are facing a de facto pay cut year after year — all because the Bank of England has proven woefully unable to meet its 2 per cent inflation target. It hard to see how the Bank’s control
of monetary policy can be described as anything other than a failure when you consider how frequently it has missed its target. 

The cost of living is still, by some margin, the biggest problem in Britain today — albeit one not felt by people who shop using Ocado and without a second thought about the price of
margarine (up 27 per cent, since you ask). The Bank’s massive gamble with Quantitative Easing also means that inflation could explode at any point, as it has so often in the past when
governments printed banknotes to pay for its consumption.

Ronald Reagan won in 1984 with the simple question, ‘are you better off than you were four years ago?’ In 2015 the answer to that question, for most Brits, will be ‘no’. If
I were a Tory in government, I would not be happy about the rising cost of living. I’d be more worried about this than anything else.

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Show comments
  • Fin de la cite

    Inflation leads to reduced spending, leads to reduced profits, leads to reduced salaries, leads to increased proportion of disposable income spent propping up a sucker’s house price to pay for the dreams one’s job cannot afford, leads to thoughts of bleeding one’s fellow worker by letting out one’s house at an inflated rent, leads to no talented young person ever wanting to move to London again.

  • Ruby Duck

    “the price of margarine (up 27 per cent, since you ask)”

    Margarine up 27% and you’re worried about it ? Lard has almost doubled.

  • xenophon

    You can say what you like about the Bank of England always missing the inflation target, every month by a substantial margin, often circa 100%.

    At least they’re always able to provide a specific explanation each time; and they’re always able to assure us that the particular factors involved are temporary.

  • Fatbloke on tour

    Chris @ 6.11

    Love the level of analysis, shows the shallowness of the right wing, GIB’by, dog boiling butters who live in SpeccyLand.

    Others who try and look into the issue would try and introduce the following into the debate –

    Property taxes
    Housing costs – long term.
    Housing costs – 2012 till 2020 compared to the lessons of the legacy of the Lawson boom in the 1990s.
    Housing costs – long term in France / Italy Germany / Spain.
    Housing inflation – Economic effects in the UK.
    Housing inflation – Good for the UK?

    All these issues need looking at.
    Acceptance based on past experience just will not do.

    Consequently –
    Away a’ bile yer heid ya trumpet.

  • It doesn’t add up…

    Whatever may be the public remit of the BoE, its policies suggest that the private agreement is that it should generate much faster inflation in a bid to achieve soft default via the erosion of debts. I’d bank on them stoking inflation higher if it shows any sign of getting close to the 2% target.

  • It doesn’t add up…

    Lower wholesale natural gas prices will not have much impact given the added green levies that offset them. Oil prices are little changed, and may go higher on Iran tensions.

  • It doesn’t add up…

    Already the pound is softening against the dollar and yen, making imports more expensive.

  • It doesn’t add up…

    Moreover, we have just about absorbed the inflationary impact of QE 1, which produced a spread lagged effect on prices over about two years after the printed cash was injected. We will soon start to see the impact of QE 2.

  • It doesn’t add up…

    This year sales were running ahead of Christmas instead, so the comparison looks better now and won’t look as good as it is supposed to in a month or two.

  • It doesn’t add up…

    and then had to run deeply discounted January sales.

  • It doesn’t add up…

    The year on year comparisons are flattered by the fact that it looks as though retailers increased prices in the run up to Christmas last year ahead of the VAT increase,

  • It doesn’t add up…

    It’s far too early to start celebrating lower inflation.

  • Forlornehope

    Just how are you going to correct an economy from a debt led consumer boom without lowering living standards? BTW, remember that increased nominal GDP reduces debt as percentage of real GDP. That’s why Osborne’s not too worried.

  • TomTom

    “House prices are stupidly overvalued. Reducing them by “stealth” in real terms is the most pain free way from them to correct. “

    You are so right….and the Mortgage Balance should be written down by the Banks pari-passu that way they can shrink their equity base. Now if only Banks were prepared to write off Bad Debts we could all relax, but of course the Banks would be bust

  • Chris

    Fathead on toast: RPI will be higher than CPI because it always is, because it includes housing costs. I did not bother to read the rest of your crap, knowing from your question that it was crap (but then, I already knew that, because it was your anal orifice it was emanating from.)

  • Tom Pride

    Cont. For what it is worth I would raise interest rates – just a bit, to give savers some relief from their undeserved punishment and to show an attempt to bear down on inflation. I cannot see a small rise in the Bank of England rate making much difference to the economy when the actual rates currently being charged by banks to borrowers bear no relationship to the current bank rate.

  • Tom Pride

    Cont. The answer would seem to be – choose the easiest, least painful way out of the hole once you are in it. It goes against my instincts but in the short term the surreptitious collusion by the Bank of England and the Government in choosing the inflation route might be the least worst option. But how, in the long term, can you ever establish a reputation for sound currency if whenever in trouble you choose the pragmatic / easy way out? And, is dishonesty ever the best policy?

  • Tom Pride

    The problem is that we are in a hole – put there by Brown-Balls reckless policies – so what is the best / most pragmatic / fairest method of getting out?

    Sure a strong currency, with low inflation, low interest rates with certainty for savers and borrowers and sound government finances, is the desired state of affairs. But, once in the hole due to a failure of policy is a rush to fiscal and monetary rectitude the best way out? Choose between the Irish way of real pay cuts, real government cuts and a hard currency versus the British way of pay cut by inflation, cuts only to increases in government spending, and a softening currency.

    The Irish way allows savers and those on fixed incomes to maintain the value of their savings and incomes while borrowers are held to their debts by the hard currency; the British saver is sacrificed to inflation while borrowers get over lenient treatment. Wage earners and the economy as a whole – well, who’s better off?

  • Cynic

    Pensioners feel the same pain and ordinary workers are facing a de facto pay cut year after year — all because the Bank of England has proven woefully unable to meet its 2 per cent inflation target.” As a pensioner I can’t help feeling it’s a deliberate attempt to inflate away the debt at the cost of the old, the prudent, the savers and anybody who wants to get on the housing ladder.

  • AR

    House prices are stupidly overvalued. Reducing them by “stealth” in real terms is the most pain free way from them to correct.

    Savers don’t have a right to earn a high risk-free rate of return, in the same way borrowers don’t have a right to expect savers to lend to them.

    Our terms of trade corrected after the global recession which followed the financial crisis, hence the value of sterling fell and drove inflation. We can opt to deal with the necessary correct in our ToT either through a real or a nominal correction in wages. The first hits all, the latter some through unemployment. You choose.

  • Holly ……

    ‘Normal’ folks take on this.
    ‘Inflation down’.YAY!
    Make subconscious note.
    Go back to what you were doing.

  • michael

    How much/little would you have to charge for your house to guarantee a sale (within a reasonable space of time)…. Be honest, that’s all its worth. (bleedin’ obvious really)

  • disenfranchised

    there’s absolutely nothing on the economic front that would give any of us even the slightest excuse for a celebration.
    certainly not inflation figures, which have been one of the government’s biggest fantasies for yonks now.
    i don’t believe a single word of it. all made up according to which nasty little agenda they’ve decided upon this week…..

  • Irascible Old Git

    Has the Office for Budget Responsibility managed to get a single forecast right since its creation by the ConDems?

  • TomTom

    “Is he suggesting that interest rates are put up?”

    NO. But it is clear the Households cannot meet increased costs for Heat, Light, Food, Transport and still fund Council Tax and that Bulk Processing Centres for Money Claims should be shut down. Time for Banks and Tax Authorities to be prevented from Claims

  • TomTOm

    The most reassuring thing is that Steve Webb wants to cancel inflation indexing of PRIVATE Sector Pensions. Only by controlling funds paid into private pensions can the Government hope to afford index-linked PUBLIC Sector pensions.

    The private sector has failed to keep up the payments to The Exchequer to fund The State and must suffer the consequences.

  • DavidDP

    This seems a rather overwrought response to news which nobody appears to be greeting with anything other than studied caution.

    Does rather smack of panic on your part, Fraser, that your analysis might not be holding.

  • ButcombeMan

    @Rational PLan
    “There are no easy options, inflation devalues debts as well savings”.

    Indeed it does and this was brought home to me during a visit to Zimbabwe recently where many people I met living in rather fine Borrodale houses, who had once had a mortgage denominated in Zim Dollars, which they had paid off quickly as the Zim Dollar devalued, were debt free-yet still had the houses! Those with foreign earnings from external capital are particularly well placed.

  • John Moss

    It is absolutely a good thing that there has been a significant decline in the real value of housing.

    The boom sustained by mountains of debt is deflating slowly and reasonable levels of affordability are coming in to view. Five more years of no cash growth would get us back to sensible levels again.

    What is needed is a rocket boost to building homes for private renting to get rents to follow a similar path. That means tax incentives for landlords to invest and needs planners to allow building where appropriate without ridiculous delays over every detail.

  • Fergus Pickering

    Ah holy fatbloke, when do we get the gold and frankincense?

  • Dimoto

    Is that the Labour troll confirming that the IFS is one of their’s ?

    Been obvious for some time, hasn’t it ?

  • El Sid

    This is the price we pay for Brown’s borrowing binge. We need real interest rates to stay negative if we are to shift his debt, just like we did after WW2. This is a good analysis : – it’s a two-coffee read, hard work but worth it. The only question is how many of the other elements of “financial repression” can be implemented by modern governments.

    Do read that BIS report.

  • commentator

    Chris Lancashire is missing the point. In order to keep our zombie banks afloat and the political class’s property assets at unsustainably high values, the Government is taking an axe to the incomes of working people and pensioners by failing to control inflation. When Cameron talks about being all in this together, just remember that he has backed high taxes on earnings and rejected additional taxation on unearned wealth, which is already subject to low levels of tax. It shows where his priorities lie.

  • TrevorsDen

    A long involved argument telling us what a miserable mess labour left us in.
    Given that wages are suppressed, that unemployment is high – just what is Mr Nelson trying to tell us. Is he suggesting that interest rates are put up?

  • Fatbloke on tour


    Oh no you are going graphs again.
    Will you never learn, economics is not your strong point.
    Add to that poor presentation.

    RPI – Gold?
    CPI – Red?

    Any thoughts on why RPI will be significantly higher than CPI over the time period?

    Any thoughts on where the OBR are getting their evidence for 4% pay rises in 2013 / 14 onwards?

    Surely bankers bonuses will not be breaking records again?
    Surely we are not about to have another property bubble?

    You have to hand it to the OBR, no myrrh who is in charge they always be relied on to come up with the goods.

    Who needs a old fashioned Tory place man when you have the media personality RC to do the business. Let’s hope the IFS manage to get things right.

    The future for them is less headline making and more solid economics focussing on understanding the issues to hand and not the Six O’clock news.

  • Rational Plan

    Of course inflation is the only way to deflate the housing bubble without people getting trapped in negative equity.

    There are no easy options, inflation devalues debts as well savings. Considering the amount of private debt we have, I’m sure its one of the ways of getting rid of it. The alternative is higher interest rates and deflation. Great for savers, not so good for the rest.

  • Alex

    Fraser – please tell me that you don’t view a drop in the real price of houses as bad news?! It was universally acknowledged to be a property bubble, remember?

  • anon

    To be honest Fraser I don’t think the government should be worried about the Regan question because overwhelming the polls show voters don’t expect to feel better by 2015.

    Yes inflation is squeezing consumption but we’re not suffering to the extent that the UK has become a third world country in the North Sea.

    Its not what we want but its not as bad as it could be and the British people know it, which is why we’ll put up with it. Maybe someday we’ll have to reap the whirlwind of low interest rates and QE but not today. And not today is all that matters for most of us.

  • Dan Grover

    I’m amazed and a little bemused how, time and time again, people in the comments here ask irrelevant questions of the writers that has no bearing on their opinion whatsoever. No, Chris lancashire, I suspect Fraser *didn’t* think it was going to go overnight, but “what I expect” isn’t the opposite to “we shouldn’t be cheering”. I don’t understand the logic, and this isn’t the only case. It seems that 3/4s of the innane comments on here are from people saying things akin to “Of course Balls is talking rubbish! The Spectator need to hire people who aren’t so trusting!!” in an article pointing out the lies.

    It’s just nonsense.

  • Heartless Curmudgeon

    um . . . Fraser . . . these wage plots . . . do they include bankers . . . politicians . . . QUANGOcrats . . . EUSSR flunkies . . . sinecures in public office . . . and all the other no-good parasites on the body corporate?

    Just asking.

  • Peter From Maidstone

    House values are entirely unrealistic. Of course people are disappointed to see the price that people are willing to pay for their house fall – but that does not reflect the real value of the property. It was only ever a function of the ridculous amount of credit being thrown at us all.

  • Dimoto

    Is a large fall in the rate of inflation a cause for celebration ?

    Of course it isn’t, and that’s probably why nobody IS celebrating (Nelson does love his straw men).

    Now here is one or two for you Fraser:

    Is a large fall in the rate of inflation cause for yet another doom ‘n gloom Jeremiad from Fraser Nelson ?

    Is (yet another) “projection” from some “think-tank” with an agenda, that UK is already in recession, and doomed, a cause for (yet more) banner headlines in the British press (notably the DT) ?

    As Osborne said, there are a lot of these forecasts around, let’s wait for the numbers, eh ?

    I expect Nelson’s next piece will be on shock/horror, business/consumer confidence hits a new low.

  • Edward Sutherland

    Fraser: many thanks for this trenchant analysis which demonstrates Coffee House at its best. What chance of Mervyn King’s knighthood being revoked for gross dereliction of duty?

  • Chris lancashire

    Of course it’s nothing to cheer Mr Nelson – what did you expect? 1.5% overnight?
    It is encouraging and a fall to, say, 3.5% next month would be further encouragement.

    And of course living standards are declining, again what did you expect? It is fairly clear to most people that we, as a nation, have for a long time lived well beyond our means. We need to go through a fairly long and certainly painful readjustment until we achieve a better balance.
    Moans like this are just that.

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