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Inflation Poised To Rebound Next Year

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Inflation poised to rebound next year

On the up: Inflation will rise again next year, experts predict

The great downswing in Britain's inflation rate is nearing the bottom, figures to be published on Tuesday are expected to show.

Dramatic price falls have slashed cost of living increases in recent months, but inflation is expected to stabilise later this year before rising again in 2010.

Expectations of greater economic buoyancy generally had a boost last week when both France and Germany reported they had returned to growth in the second quarter of this year.

The news sparked share price surges in London and on continental markets as hopes rose for an end to the slump in the UK.

But any pick-up in price rises will come too late for millions of retired people and others whose State pensionsand other benefits are increased in September in line with formulas based on the prevailing inflation rate.

They will receive low increases, reflecting a period of falling price rises.

'We are not far off the bottom in terms of inflation,' said Peter Dixon, strategist at Commerzbank. He forecast that the July Consumer Prices Index (CPI) would fall to an annual rate of 1.5%, from 1.8% in the year to June.

For the broader-based Retail Prices Index (RPI), Dixon said that Tuesday would see a fall to minus 1.8% in the year to July, from minus 1.6% in the year to June.

But he added: 'From September and October, the falling oil price of last year starts to drop out of the figures, and from January, the 2.5% VAT cut will be restored, pushing up prices.'

George Buckley, chief UK economist at Deutsche Bank, forecast CPI of 1.7% in the year to July and RPI unchanged at minus 1.6%.

He expected CPI to touch bottom at 0.8% in September.

The downswing in price rises has been dramatic. As recently as January, the CPI annual rate was running at 3%, one percentage point above the Government's target. But as the recession tightened its grip, the CPI went into freefall.

City analysts in general are expecting a return to about 2% for the CPI in 2010, in line with the Government's target. Buckley said: 'Recovery in Germany should be good news. There is a close link between economic growth there and in Britain, given Germany is our biggest European export market.'

But elsewhere in the eurozone, the picture remained gloomy last week, with the area as a whole showing a 0.1% fall in gross domestic product during the second quarter.

Last week, Mervyn King, governor of the Bank of England, warned that Britain's 'recovery could be slow and protracted'.

'In the short run, inflation is likely to be volatile, at first falling quickly as the impact of last year's sharp increase in energy prices drops out of the 12-month comparison before rising sharply as last year's VAT cut is reversed,' he said.

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Last week, Mervyn King, governor of the Bank of England, warned that Britain's 'recovery could be slow and protracted'.

'In the short run, inflation is likely to be volatile, at first falling quickly as the impact of last year's sharp increase in energy prices drops out of the 12-month comparison before rising sharply as last year's VAT cut is reversed,' he said.

So what the MPC do about the sharp increase?

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Inflation poised to rebound next year

On the up: Inflation will rise again next year, experts predict

Dramatic price falls have slashed cost of living increases in recent months, but inflation is expected to stabilise later this year before rising again in 2010.

Really ?

Diesel costs about the same as it did 6 months ago.

Food costs about the same as 6 months ago.

I think my energy supplier told me that may gas/electricity is about 10% cheaper (10% of not a lot, is not a lot).

The stuff I buy for my work is no cheaper.

Clothes ? Still wearing stuff I bought ages ago.

"Gadgets" ? PC components have always fallen in price, so that`s hard to judge.

Gig ticket cost me £31, about "normal".

8 cans of lager still costs around £6.

Dramatic price falls ? Where ?

Edited by Prof

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Really ?

Diesel costs about the same as it did 6 months ago.

Food costs about the same as 6 months ago.

I think my energy supplier told me that may gas/electricity is about 10% cheaper (10% of not a lot, is not a lot).

The stuff I buy for my work is no cheaper.

Clothes ? Still wearing stuff I bought ages ago.

"Gadgets" ? PC components have always fallen in price, so that`s hard to judge.

Gig ticket cost me £31, about "normal".

8 cans of lager still costs around £6.

Dramatic price falls ? Where ?

VAT going up in New Year. Can't say I've noticed the reduction too much in this area though!

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Really ?

Diesel costs about the same as it did 6 months ago.

Food costs about the same as 6 months ago.

I think my energy supplier told me that may gas/electricity is about 10% cheaper (10% of not a lot, is not a lot).

The stuff I buy for my work is no cheaper.

Clothes ? Still wearing stuff I bought ages ago.

"Gadgets" ? PC components have always fallen in price, so that`s hard to judge.

Gig ticket cost me £31, about "normal".

8 cans of lager still costs around £6.

Dramatic price falls ? Where ?

you keep on comparing prices to 6 months ago, after the 200+% rises from 2-3 years previous.

ps - how's that average UK wage (wanted to put deflation in strikethrough here btw ;) ) inflation ;) going btw.....

pps - how are you preparing that meal of lager, gig tickets, pc components & a pair of socks ?

I however, am not stupid. :)

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those who follow the stats too closely risk being manipulated.

use them only in conjunction with good anecdotal & additional TFH reading. ;)

don't you all get that gut feeling that the stats are being fudged (in most/all areas) & you are all being lied to ??

deflation my ar$e.

watch what they do, not what they say. :ph34r:

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Dramatic price falls have slashed cost of living increases in recent months

Pure ********.

Maybe not. Look at what is actually said. Very subtle. All they are saying is the rate of increase has been 'slashed'. They are not even saying if the cost of living has actually fallen or not..

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they are the 'do nothing' central bank. well, as far as IR's are concerned.

They'll cut rates without hesitation but raise them reluctantly. Watch the jump in inflation caused by the 2.5% VAT increase be ignored as a one-off short-term blip, unlike the the previous 2.5% cut, which was more evidence of deflation requiring urgent action.

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They'll cut rates without hesitation but raise them reluctantly. Watch the jump in inflation caused by the 2.5% VAT increase be ignored as a one-off short-term blip, unlike the the previous 2.5% cut, which was more evidence of deflation requiring urgent action.

Correct Woof.

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The headline is purely an attention grabber and is not really borne out in the rest of the copy.

City analysts in general are expecting a return to about 2% for the CPI in 2010, in line with the Government's target. Buckley said: 'Recovery in Germany should be good news. There is a close link between economic growth there and in Britain, given Germany is our biggest European export market.'

Wow - runaway CPI inflation of 2%. I'm scared. And wasn't this supposed to be the target, anyway?

This is a 'no news' story on a 'no news' sort of a day.

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For every inflationist there's a deflationist and this article makes far more sense to me

http://www.marketoracle.co.uk/Article12749.html

Inquiring minds reading about the threat of massive inflation looming on the horizon are asking "Where's the Inflationary Beef?" It's a good question too, so let's search far and wide for symptoms.

US CPI Drops Most Since 1950

Bloomberg notes U.S. Consumer Prices Unchanged, Matching Forecasts.

The cost of living in the U.S. was unchanged in July, and dropped by the most since 1950 from a year ago, as the recession sapped companies’ pricing power.

Spain's Inflation At Record Low

Forbes is reporting Spain's inflation at record low in July.

Spanish consumer prices fell in July at the steepest rate since records began in 1962 but were expected to have hit bottom as oil and food prices recovered.

Consumer prices were down 1.4 percent year-on-year in July, final National Statistics Institute data showed on Thursday, in line with economists' forecasts.

Eurozone Prices Fall Record .7 Percent

Bloomberg is reporting European Consumer Prices Drop More Than Estimated

European consumer prices dropped more than initially estimated in July as energy costs decreased and rising unemployment prompted households to cut spending.

Prices in the 16-member euro region fell by a record 0.7 percent from the year-earlier month after declining 0.1 percent in June. Adding to signs of waning price pressures, European producer prices dropped a record 6.6 percent in July from a year earlier.

Unilever, the world’s second-largest consumer-goods maker, said on Aug. 6 that price cuts helped boost Western European sales in the second quarter. Paris-based Carrefour, Europe’s largest retailer, last month reported a second straight drop in quarterly sales due to “tough†conditions in France and Spain.

German Prices Drop First Time in 22 Years

Spiegel Online is reporting German Consumer Prices Fall For First Time in 22 Years.

This week German statisticians confirmed the first annual decline in consumer prices in the country for more than 22 years. The country's Federal Statistics Office released figures showing that consumer prices had dropped 0.5 percent in July compared to the same time last year. This is the first annual decrease since March 1987, before the reunification of Germany.

Meanwhile another indicator of price movements, wholesale prices, also dropped -- by 10.6 percent in July year-on-year, the biggest fall since the data began to be compiled in 1968.

More Peas In The Pod

Earlier today I spoke of Peas In The Deflationary Pod noting that Walmart (WMT) is lowering prices on everything from baked beans to Black Angus beef to flat panel TVs, and Safeway (SWY) slashed pices by as much as 25% on thousands of items including consumer staples like coffee, paper products, and laundry supplies.

Today Bloomberg noted that "retailers including Nordstrom Inc. (JWN), Abercrombie & Fitch Co. (ANF) and American Eagle Outfitters Inc. (AEO) have used discounts to lure consumers on tight budgets in the aftermath of job losses and home-price declines."

Confusion Over Inflation

Articles like these have people confused about what inflation is. Indeed every week I have someone email me that "We have inflation and deflation at the same time."

No we don't. It is not possible. The reason is falling prices are a symptom of deflation not a definition of it. Falling prices frequently accompany deflation, but they are not a necessary ingredient.

If you need a refresher course please read Inflation: What the heck is it?.

An Austrian Economic Definition Of Inflation

In Austrian economic terms inflation is a net increase of money supply and credit and deflation is the opposite, a net decrease in money supply and credit. In those terms we either have inflation or we don't. Prices simply do not fit into the equation.

Not all those calling themselves Austrian economists would agree with that definition. Some consider money supply only. But even by that definition, we either have inflation or we don't.

The notion of inflation and deflation at the same time is a widely held belief based on brainwashing by the Fed about what inflation is. If everyone realized inflation involved money supply, the Fed and Central Bankers would not be able to lie through their teeth about being "inflation fighters".

Once you realize that inflation involves money supply, you must come to the realization that the only source of inflation in the world comes from Central Bankers. Unfortunately, the media has bought the Fed's "inflation fighting" mantra hook line and sinker by talking about inflation as if it was prices.

Yes prices of some thing can rise while others fall. However, that will ALWAYS be the case from now until eternity. This makes the seemingly powerful statement "we have inflation and deflation at the same time" cute, but meaningless nonsense.

Fiat Mathematical Model

Those who model the world in terms of money supply only, ignoring credit, have missed the boat big time. They have been looking for massive "price inflation" for years pointing out the huge printing by the Fed.

Yes, in isolation, printing is inflation. But its effects are nonexistent when credit, marked to market, is plunging at a greater rate as is the case now. I talked about this concept in detail in Fiat World Mathematical Model.

The Fed and Central bankers, try as they might, simply have not been able to force banks to lend or consumers to borrow. For a real eye opener, take a look at the five charts in US Consumer Credit Shows Steepest Contraction in Over 5 Decades.

Those calling for higher prices because of all the printing blew the call and those looking only at prices to begin with were not even in the boat.

In a credit based economy one must take credit into consider first and foremost to have a chance at getting the global picture correct.

Where's the Inflationary Beef?

The answer is: There is none, nor will there be any unless the Fed can coax banks to lend or consumers to go on another huge spending spree.

With alternative measures of unemployment over 16%, with an unprecedented 4.4 million workers have been unemployed and looking for work for 26 weeks or longer, with 1.5 million unemployed on the verge of expiring over 52 week of extended unemployment benefits, and with home prices crashing and $trillions in imaginary "wealth" wiped out, pray tell what is the likelihood of consumers going on a huge shopping spree?

By Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com

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Just got a bond paying 4.35% - savings rates are heading up nicely at the moment.

Sounds like a 2 yr bond or longer, in which case, better hope that inflation doesn't rise to a heady 5% or soar away to a scorching 8% or ... you get the idea. Under Labour, anything's possible. Remember 22% one or two Labour administrations ago? ;)

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Wages are falling and the proportion of unused productive capacity is high and rising. The QE money is being used to recapitalise banks (they lost all their capital, remember?), not to increase lending. Consumers are cutting back spending and paying down debt. Assets are still massively overvalued. Interest rates can only go one way. This is pretty clearly a deflationary environment.

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