Sunday 28 March 2010

UK Inflation – March 2010 Update

The Office for National Statistics has reported the February 2010 UK Consumer Price Index (CPI) as 3.0% down from 3.5% and the UK Retail Price Index (RPI) as 3.7% which is identical to last month.
My first chart is tracking the CHAW Index which is the RPI including All Items. I focus on the RPI as my National Savings and Investments Index Linked Savings Certificates use the RPI to index from. The current level of the Index remains above the trend line and now appears to be diverging further from trend.

The second chart is again based on the CHAW Index. This chart shows annual figures based on the previous 3, 6 and 12 month’s worth of data. As of February the 12 month figure is 3.7% (as published by the ONS), the 6 month figure is 4.5% annualised up from 4.2% and the 3 month figure is 4.8% annualised up from 3.5% annualised.

The Bank of England is stating that inflation will now start to head back towards their target of 2% however looking at the RPI (versus their CPI targets) charts above doesn’t look like inflation is heading downwards to me. The Bank of England, by making these downward inflation projections can of course continue with their strategy of helping those who have over extended themselves. They are doing this by keeping the Official Bank Rate at 0.5% leading to reduced loan rates form the banks plus also helping out by inflating their debts away. The prudent savers (like myself) will of course continue to be punished as the value of our assets continues to be reduced as it is currently impossible to get a real (after inflation) return after tax is paid.

Of course this inflation route will also help our indebted government as their debts are of course inflated away.

I’m really now starting to think a bond strike or run on the pound would be a good outcome. With the first we get the International Monetary Fund (IMF) coming in and hopefully sorting this mess out. With the second the Bank of England would have no choice but to face up to reality and put the Official Bank Rate where it should be. Of course it would be messy in the short term but in the long run could be just the medicine that is needed.

As always DYOR.

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