Wednesday, March 25, 2009

CPI really 4.6%?

Millions are caught in the inflation trap

The collapse in the value of the pound and a surprising rise in food prices has left inflation stubbornly high. CPI has risen from 3% to 3.2%. Indeed, had the Chancellor Alistair Darling not cut the rate of VAT from 17.5% to 15%, CPI would be standing at an uncomfortably high 4.6%, more than double the target of 2 per cent. The richest fifth of the population are enjoying the lowest rates of inflation, about minus 1 per cent; the items that have risen the most, such as food, represent only a fairly small proportion of their spending.Meanwhile the poorest fifth have seen their cost of living rise by nearly 6 per cent.

Posted by little professor @ 12:40 AM (4077 views)
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8 thoughts on “CPI really 4.6%?

  • Grumpy Middle-aged Git says:

    So does this mean that the government (sorry BoE) will have to raise interest rates to comabat rising inflation or will it switch back to using the RPI indicator which is handily close to 0% in order to continue the artificial bail-out of UK debt?

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  • Agree with you GMAGit : Surely a case for raising interest rates given the rise in inflation?

    But wait – won’t that mean that those currently paying about £1 per month for their artificially low mortgages (teaser rates, I believe they were called in pre-credit crunch days……) will have to pay the “going rate” like the rest of us mortals? Can’t have that, can we ? The poor diddums might suffer…..Therefore expect the govt to fight tooth and nail any proposed IR rises. They have no more tools in the box to combat inflation and stubbornly refuse to use IR’s. Anything to keep the housing bubble inflated, at any cost to the nation.

    As for using CPI or RPI ? This is called moving the goalposts. I suspect the media, govt and banks will now use the RPI figure more and more until CPI is erased from the collective memory of the nation. They have no shame or scruples , this bunch.

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  • LP

    On this occasion, I am inclined to agree with Danny boy, but it has to be remembered that if the MPC had followed his advice, the consumer credit bubble would have inflated further before it burst.

    Looking at one economic indicator – inflation – to the exclusion of all other considerations was a flawed stategy, and if you look at this sites archives, you will see that I forecast about three years ago that they would ultimately be forced to abandon the policy.

    I personally think that balance of payments imbalances are just as much a concern as inflation – Japan ran a surplus for years, and came unstuck as a consequence. China is now making the same mistake. The UK & US have run a huge deficit, and that is now coming round to bite us.

    If it is policy to keep the balance of payments neutral, then a country is much less likely to get into major economic difficulty.

    Global ‘Free trade’ has been an aspiration of many countries for years now, and few dare to challenge the principal. However this also causes problems, when one country becomes over-dependant on another, and currency fluctuations occur.

    It is better for countries to be more self reliant, especially with regard to food, and to confine imports to those items that they cannot produce themselves. To that end I think it is better to have a fixed global tariff – maybe 25% on all cross border shipments – in place of free trade.

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  • it_is_going_with_a_bang says:

    I see this as assets depreciating in value and the cost of living generally going up.
    The rather ridiculous level of interest rates means that RPI is relatively meaningless.
    CPI is my measure of what the cost of living is.

    For example, if you own your own home outright, renting private or council based then silly rates won’t mean anything.
    Council House rents have just gone up and not down. Council Tax has just gone up – 3.6% here.
    Lending on many things is more expensive than it was with 5% + rates.
    Interest on savings has been destroyed – almost completely – taking away earnings from millions.

    I am still of the opinion that rates have been set to save banks and not people.

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  • uncle tom said, “If it is policy to keep the balance of payments neutral, then a country is much less likely to get into major economic difficulty.” –
    Sounds good to me.

    “maybe 25% on all cross border shipments” –
    I don’t agree with this approach.
    Free trade may mean the occurrence of temporary co-dependence, but the free trade principle also acts to naturally dissipate these dependencies since competition is ever more present, yes a flat fee would also give such a level playing field, but there is no way to place a size on such a tariff such that it works for ever, one day it would cause even more problems, let alone the need for policing the tariff and the resulting black market. Therefore either the tariff should be flexible (which we see as problematic now) or non-existent.
    (I do agree that it is better for there to be more self sufficiency, however I think this should evolve naturally rather than being enforced since the negative consequences of the attempts are likely to be worse.)

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  • another alan says:

    King was pretty disgusting yesterday, laying the blame on the remit (and I quite like the guy: it’s all relative). The MPC has clearly not been following the remit for a couple of years anyway.
    And also the talk of switching to RPIX to include mortgage costs…

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