Wednesday, January 17, 2007

Inflation Shocker


Let me make up a few facts...

A few days back we gave thanks for Bank of England independence, and yesterday we found out just why they'd been forced to jack up interest rates so suddenly. The fact is, they've been quite as shocked by the spurt in inflation as most outside forecasters.

As the FT reminds us this morning:

"Back in late 2004, when it was setting interest rates to hit its 2 per cent consumer price inflation target two years hence, the BoE monetary policy committee calculated there was only a 12 per cent chance of CPI inflation exceeding 2.5 per cent at the end of last year. The following August it was almost cocky, putting only a three per cent probability on that outcome and suggesting there was no chance of inflation rising above 3 per cent.

So great has been the surge in inflation, however, that what was once thought almost impossible is now reality. CPI inflation hit 3 per cent in December, the highest in 11 years; the fourth quarter CPI inflation rate rose to 2.7 per cent; retail prices index inflation at 4.4 per cent was at its highest rate for 15 years; and RPIX inflation, which excludes mortgage interest payments and was the Bank’s target measure before 2004, rose to 3.8 per cent."

Now we can all make mistakes- even those brainy people at the Bank. But at least they've recognised their mistake, and they're taking firm action to put it right.

Contrast that with the Blessed Leader. Yesterday, he was asked about the inflation situation at his monthly press conference. This is what he said:

"Look, inflation has risen not just in this country but in most of the major countries because of rising energy prices, rising oil prices which have doubled, tripled, over the past few years. That however is expected to come down in 2007 and we expect to come back to the 2% inflation ... it is worth pointing out for example that if you take America on the same measurement of inflation they went over 4%, Europe went up to 3.3%.

This is a very common issue. It is driven by these rising energy prices and it will fall as the energy prices fall."

Interesting. You wonder why those dunderheads at the Bank didn't know that. They're clearly inflicting interest rate pain we don't need to suffer. They'll be pulling the wings off flies next.

Of course, one reason the Bank didn't pick it up, is that it isn't actually true. In fact, not for the first time, Blair was telling the most monstrous family size porkies.

According to the official CPI release from the Office for National Statistics, our CPI inflation has increased over the last year from 1.9% to 3% (12 month rates, December 2005 compared to December 2006).

According to the same document (table 7), over the most recent 12 month period available- November to November- comparable CPI inflation in Germany fell by 0.7%, in France it fell by 0.2%, and across the Euro area as a whole, it fell by 0.4%.

And America? For some reason the ONS release doesn't include the US, but it is included in HM Treasury's Pocket DataBank. And there, table 16a tells us that US CPI inflation fell from 3.5% in November 2005 to 2.0% in November 2006 (latest figures).

Just to nulabour the point: as well as being the Bank's target, the CPI is the internationally accepted comparable measure of retail price inflation across economies. And it shows that whereas Britain's inflation has taken off over the last year, in most major economies- including those specifically named by Blair- it has fallen- despite the increase in energy prices. We are an outlier with much worse performance than other countries.

Now we all know about damned statistics, and I'm sure Blair's spinners might be able to find some bizarre statistical artefact to support what he says. But the rest of us just aren't interested in his bullsh*t any more- what we need to know is what's actually happening in the real world. (Sadly predictable that none of the assembled lobby journos questioning him yesterday were on top of the facts).

And the moral?

Once again we can see precisely why politicos could never be trusted with the management of monetary policy.

I wonder why we still think they can be trusted with the management of all that other stuff?

PS I'm not the only one to pick up on Blair's inflation commentary. Over on Rightlinks, my old colleague from DDFL days, the excellent Serf, points out a fundamental flaw in TB's point about energy prices. Also, somebody called Tyler posts a spookily similar article to this one over on TheFisk.com, the brand new 18DS site edited by Sam Coates.

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