Wednesday 19 May 2010

UK Inflation – May 2010 Update

The Office for National Statistics has reported the April 2010 UK Consumer Price Index (CPI) as 3.7% up from 3.4% and the UK Retail Price Index (RPI) as 5.3% which is up from 4.4% last month. Regular readers of Retirement Investing Today will I’m sure not be surprised by this at all as the Bank of England have clearly positioned themselves to let inflation run.

As always 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. I currently have 20% of my low charge portfolio held within them which are now starting to prove their worth. The current level of the Index remains well above the trend line and continues to diverge 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 5.3% (as published by the ONS), the 6 month figure is 6.3% annualised up from 5.0% and the 3 month figure is 9.0% (!) annualised also up from 5.0% annualised. So the inflation continues to be bedding itself in nicely.

Of course the Bank of England Governor Mervyn King has now written himself another letter to the Chancellor. That’s 7 letters in 24 months. If I did my job that well [sic] I’d be sacked. I also don’t get paid £290,000 to be continually wrong. The letter may as well have said blah blah blah. Let’s just have a quick look:

- The first cause is apparently higher oil prices. Oil is currently about $73 per barrel which is well below the peak of $145 or so. The main reason oil seems expensive is that the Bank of England and previous government have managed to devalue the pound so far. It’s not a case of blaming oil instead they should be blaming their poor management. Mr King makes a statement that ‘... oil prices, which on average in April were nearly 80% higher than at the beginning of 2009...’. That’s a very convenient data point to use. This was the low point for oil over the previous cycle and is not representative of any sort of long term average price. Have a look here if you’re interested.

- The second cause is apparently VAT returning to 17.5%. I’m not going to say too much about this as I’ve made plenty of comments in previous posts. When the VAT was reduced to 15% they used the inflation reduction that this provided as a quick we’re in deflation, panic panic, drop interest rates. In my opinion if you use the VAT reduction to set policy from and don’t ignore it then you also have to use increases in VAT to set policy from. What’s Mr King going to say when George Osborne puts VAT to 20%?

- Finally the third cause is the sharp depreciation of sterling in 2007 and 2008. Well Mr King you and the government very much caused that with your trash the pound policy of almost zero interest rates and quantitative easing (QE).

The Governor then goes on to say that there is ‘downward pressure on inflation from the substantial

margin of spare capacity in the economy.’ Now here’s a question. What if there isn’t spare capacity in the parts of the economy that aren’t government distorted and being propped up? Now I’m only a statistical sample of one, but in the circles I move companies are running at well over capacity. Additionally they are trying to force prices up to increase margins and cover the increased input costs they are seeing. That doesn’t sound deflationary to me. Maybe Mr King and the MPC need to get out a little more and see what’s happening in the real world. That is unless I’m not typical of the situation the UK currently finds itself in. I know I’d certainly be interested to hear reader’s experiences here. Please leave a comment to share what you are seeing out there.

As always do your own research.

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