Wednesday, April 8, 2009

Deflation???

Shop prices soar as pound pushes up food costs

Shop prices rose during March as the weak pound continued to push up the cost of food, new figures showed today. Shop price inflation edged up for the fourth month in a row to 2 per cent March from 1.9 per cent in February, data from the British Retail Consortium (BRC) revealed. The findings emerged after official data confounded expectations that the country would slump into deflation in February, as CPI inflation unexpectedly ticked up to 3.2 per cent from 3 per cent.

Posted by sold out @ 05:14 PM (4173 views)
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21 thoughts on “Deflation???

  • japanese uncle says:

    Threble the IR and that effective immediately. There is no longer any case for loe IR.
    My prediction for deflation was based on the assumption that MPC members remained sane, which proved otherwise.

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  • Bad news especially given the VAT cut has a damping effect on CPI inflation figure.

    Once that kicks back to 17.5% or even poss 20% inflation will be much more news worthy.

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  • britishblue says:

    Not being an economist, I don’t know whether the exchange rate on food prices has a delayed reaction effect. But the pound has been rising recently, not falling.
    The end of December 2008 which was the real low point for the pound. Since then it has risen against other currencies (If the pound were housing it would be called a housing boom by all the vested interests).

    At end of December 2008:
    It was around 1.02 to the Euro. Now it is around 1.10/1.11
    It was around 1.43 to the Dollar. Now it is around 1.47 (long term average 1.55)
    It was around 1.52 to the Swiss Franc. Now it is around 1.68 (I have a vested interest in this as a swiss franc mortgage holder)
    In Eastern Europe it was around 1.42 to the Zloty (Now around 4.9)
    It was around 1.30 to the Yen. Now it is around 1.46

    The pound has passed three major tests in the last three months, arguably with flying colours!
    a. The first was the at the end of the year when speculators were trying to get the pound to Euro parity. Jim Rogers , etc. On mass they were talking about the demise of the pound. They didn’t manage to get their pay day.
    b. The second was in February with the ‘unforseen’ bail out of the banks, costing us tax payers billions.
    c. The third was the UK announcing it was going it alone (in Europe) on fiscal stimulation. (in otherwords diluting the value of existing money).

    Each of these events could have crippled the pound much further, if all was rosy on all other continents. Which we know it isn’t.

    So why has the pound not failed and now appears to be strengthening? Is it that it has already crashed and hit the bottom 3 months ago.(Remember you used to be able to get 1.7 Euros to the Pound)? It it that the rest of the world actually thinks that the steps the UK government are taking are better than the steps that there own governments are taking? Is it because apart from Euro zone the rest of the world are employing fiscal stimulation? Or is it that the focus is shifting from the UK being the only sick major economy apart from the States to others like Japan, China, Germany, etc, being sucked into this downward spiral at an increasingly fast rate. I have my own views, but would be interested in others.

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  • The BoE has done a wonderful job of combatting deflation.

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  • @3. britishblue
    I would hardly call any of the above figures a success, these are just day to day forex movements and could well be the effects of the way the markets work – rather than anything else. I think the UK, & particularly Sterling, is completely insolvent; there is no room for UK government to move in any direction.

    It’s my belief that Sterling will soon collapse, like Iceland – a country that was unable to support the massive amounts of debt that it is responsible for.

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  • “My prediction for deflation was based on the assumption that MPC members remained sane”

    Japanese Uncle, I respectfully suggest that the MPC are pretty sane and know exactly what they want to do – create as much gentle inflation as they think they can get away with. The big benefits to the government of high inflation are a halt to house price falls (in nominal terms) and an erosion of our debts. Obviously, it’ a risky strategy but it may be our least worst option right now. I’m convinced that this is what our government secretly wants, whatever it may say in public.

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  • stillthinking says:

    Surely the collapse in sterling is due to the collapse of our debt exports. Foreigners no longer want to buy sterling debt, and there is nothing else they want to buy. The price of food is not inflation as such, more a correction to the relative costs of say european food production against non-debt UK exports.
    Wages are falling, asset prices are falling. If we were capable of growing enough food in the UK to satisfy all the mouths, then I am sure food prices would also be falling. Taxes are also probably going to rise. While the government can expand the money supply, they don’t so far seem capable of expanding the money supply per individual.
    If the average person has less money per month than they did before, that would be deflationary. Food, something we don’t produce, is expensive because we don’t produce it…
    For the UK to get serious inflation would require our external debtors to start cashing in their debt holdings against UK production, something most extremely unlikely to happen. I think inflation in a way is too narrow an idea to describe the state of an economy. Sterling has fallen, but sterling fell before the government announced huge borrowing plans. I see sterlings decline as a reflection of very low foreign desire for the currency because we don’t make anything.

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  • I respectfully suggest that the MPC are pretty sane and know exactly what they want to do

    why should anyone listen to the idiots who helped get us into this mess in the first place?

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  • I see sterlings decline as a reflection of very low foreign desire for the currency because we don’t make anything.

    Yes, if no one wants to buy the debt, then it needs to be supported, if the UK can’t support it, collapse is inevitable.

    I think the UK is treading water at the moment…..just! Gordon Brown will try to keep things looking good for as far as possible, and it will all happen really, really quickly…..like the falling of the Berlin Wall.

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  • People were saying that they could not see inflation taking off.

    I say and have always said HYPER INFLATION causing DEPRESSION. The very organisations that are MEANT to control inflation will

    be the very cause. The fox guarding the hen house I’m afraid.

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  • stillthinking says:

    We all obsess about fiscal policy and borrowing because it is the only tool that our elected leaders have. Consider a vacuum manufacturer, of course it is useful to consider how much capital the company has, what their pension obligations are and their wage agreements etc, but all that is overridden if the vacuum cleaners they make are cr*p.
    What makes it all so much bleaker for the UK, in particular the New Labour voting heartlands of the North of England, is that over the last ten years their employment has come from increased government spending. This reminds me very much of the Oxfam(maybe) slogan about the starving in Africa about giving them a fish and they are fed for one day, but give them a net and they can catch their own fish. New Labour have been handing out fish to large swathes of the population and the fish have run out (literally in this case).
    The UK has and is going to become much much poorer irrespective of the disbursements of government coupons (aka money), we don’t have nets. Further, we are -dependent- on imports, not just food so we cannot yank the chains of our importers without getting summarily cut off, which is why GB will be forced to tread carefully (malnutrition being mentioned already in the papers).
    Further, after a 30% devaluation of sterling, the only surprising thing is that -all- imported good prices didn’t rise much sooner and much more.
    Worse (!), aside from being forced to bid -more- for foreign goods, we aren’t even the only holders of sterling anyway. The world is flush with sterling IOUs. Germans, Chinese, Madagascans etc are all bidding with sterling as well.
    Poverty and inflation seem separate to me basically.

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  • The world is flush with sterling IOUs. Germans, Chinese, Madagascans etc are all bidding with sterling as well.

    Excellent point….but how long before the dumping?

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  • stillthinking says:

    I am not so sure they will dump. Maybe a threatening move. Imagine you lent £20K to a neighbour, you thought you would be able to milk him for the interest for ever, but it turns out you didn’t know him so well and in fact he’s a drunk who has difficulty holding down a job.
    What is worse, everybody knows so you can’t sell your IOU on.
    You made a mistake. Nothing to do but wait until some sign of talent is shown, maybe sweeping up or something, and get them to do that.

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  • 12. stillthinking

    We not only need nets, we need the best. We are competing in a world that can produce anything. Inovation has to come back to Britain I personally have a great idea along I’m sure with many others, but the cost and dubious rules of patenting are prohibitive. We need a body to oversee ideas to improve our industries and financial help to develope the best of those. We need nets that are better at catching fish than our competing (Eastern) fisherman. The Industrial banking system can do without inovation as it clearly has not worked. It’s Industry that needs it and hopefully the investment that once went into property will be directed to a more productive investment vehicle.

    Not only will we have fish in our own waters but those fish will be unique and attractive to overseas buyers.

    INOVATION, and I don’t mean green taxes, speeding fines, parking fines, Inheritent tax, the list is almost endless………………. ….
    …………………………………………………………………………………………………………I mean a proper new economy.

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  • britishblue says:

    Crunchy @15… The UK actually has a good track record of innovation e.g. 15 of the top 75 drugs are from the UK, etc. The argument that we don’t make anything any more has to be put in the context that this is a has happened over the past 25 years. Big, bad Gordon hasn’t been responsible for this over the past few years and this is not the reason for Sterlings demise. Only a few years ago sterling was the safe haven currency and the argument that we didn’t manufacture anything could have equally been applied then.
    I personally think that Sterling has bottomed. The depreciation was huge and it was based on the UK being an identified’ disaster country’ over 6 months ago when the world thought the likes of Germany, Japan and China would ride the storm.

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  • ST been away for a bit but good to see the quality of your posts just doesn’t dip. Thought post 8 summed things incredibly well.

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  • 16.
    Sterling was only in favour a few years ago because of high interest rates, It’s time of being the safe haven or world currency (as Dollar until now) was back in the 18th and 19th century

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  • I personally think that Sterling has bottomed.

    I always find it amazing how optimistic some people can be – usually there is a vested interest behind it and they won’t see what is really happening.

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  • Britishblue says:

    HP @18 Its not just about having a vested interest. I have watched the pound on a daily basis for 3 years. My vested interest was having an import company that closed some months ago because of the demise of sterling, with UK companies picking up business that I was bringing in from abroad. So on a personal level the devaluation hurt me, but British business gained. I suspect that the devaluation has actually been good for the UK and that we should be thankful we are not in the situation that Ireland is in on a fixed currency. I personally think that Sterling was horribly overvalued for years (just like house prices) meaning that when we went to comparable countries to the UK everything was cheaper from hotels, food, taxi’s, etc.

    I am basing my suspicions that sterling has bottomed (or reached fair value) by the fact that sterling has passed three major tests in the last 3 months that should have tipped it over the edge. (as per my post above). It didn’t, plus other countries are catching up the UK in how dire their economies are. Also, what happened at the G20 last week with money being pledged to the IMF,means that there is money there if the UK needs it. Therefore, I believe unless there is a crisis of gargantuan proportions sterling will level or slowly regain a little ground and wont be tested at Euro parity again. If there is a crisis of gargantuan propotion’s which has to be bigger than anything we have experienced so far then that’s a different story. Also sterling is not in isolation. If Japan, the Swiss, The USA, etc are all undertaking fiscal stimulation then this in normal circumstances would lower their currency. However, it is the Euro that I am watching. With Spain, Ireland and Italy virtually bankrupt states and policy seemingly been driven by the German economy something has to give sometime. So the unknown is whether there will actually be a larger crisis in the UK or whether sometime, something in Eurozone will implode which will effect theri currency and by default sterling goes higher.

    You will have note from my earlier post I opened it up to discussion and didn’t give an opinion one way or the other. It is not about being optimistic about a vested interest. Its about weighing up all the factors that effect a situation and then formulating an opinion. The beauty of forums is that you can give an opinion. The rest of the readers can decided whether there is any substance to this or not.

    As Yogi Berra said, ‘Its tough to make predictions. Especially about the future.’

    Lets check again in six months

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  • need-a-crash says:

    As stated in the comments under the article:

    “Yes all political, target CPI on the way up and RPI on the way down. After all this country now only has the housing bubble as it’s main industry,where will it all end!!”

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