Wednesday, January 19, 2011

U.K. Facing Inflation Near 4%, Central Bank Keeps Rates Ultra Easy, Raising Public Ire

Interesting developments across the pond as the U.S. mini-me, the United Kingdom is facing many of the same issues developing here.  (err, if you distrust government data that is)  I have never researched how the U.K. measures inflation, or more importantly how it differs from how the U.S. measures it, but there appears to be quite a contrast as somehow "they" have inflation and "we" do not.  This despite 2 countries chock full of unemployment, rolled over by a financial sector gone berserk, with housing sector disasters, and credit implosions.   If anything with the massive federal government fiscal stimulus that has no end in the U.S. in stark contrast the austerity measures in the U.K.,  [Oct 21, 2010: UK Unveils Serious Austerity Measures - Potentially Slashing Half a Million Public Workers] not to mention near permanent QE by our central bank, we should in theory be seeing more inflation then they are.   But through the magic of American government statistics we are inflation free, while the consumers in the U.K. are suffering from rising prices.  Whew! Glad domestic consumers have no such issues.

Either way, what is developing over there might foreshadow political pressures locally if Bernanke and our merry band of speculators on Wall Street are successful in inflating oil to $120+.   Or more likely, our astute representatives will drag the "big bad oil CEOs" up to Capital Hill for a grilling on all the evil things they are doing.  While Bernanke chuckles.

If you are unfamiliar with the process, in the U.K. if inflation is over target (2%) by more than 1%, the Bank of England Governor must write a letter to their version of the U.S. Secretary of Treasurer.  (you can see the letters here)  So we have letters in Britain, revolts in northern Africa, food riots in Africa and now parts of the Middle East, but thankfully we are the one country on earth devoid of any inflation.  Lucky us - keep pressing the accelerator Ben - Goldilocks baby.

Via Bloomberg:
  • U.K. lawmakers who scrutinize Bank of England officials including Governor Mervyn King said they’re concerned about accelerating price gains and want reassurance the central bank isn’t losing control of inflation.  “This is a big test for them now and they need to weather this to ensure that credibility is maintained,” John Thurso, a Liberal Democrat member of the British Parliament’s Treasury Committee. “I’m looking for reassurance” that “we’re not just quietly abandoning the inflation target.
  • U.K. price growth soared in December and economists forecast it may accelerate again this month after an increase in sales tax. King is due to face the committee after the bank publishes new forecasts in February, and lawmakers are stepping up public pressure on him to justify why policy makers are holding the key interest rate at a record low after inflation exceeded the bank’s 2 percent target for more than a year. (hint to British government statisticians: when the data is disagreeable, just change the way you compute the data to make the number "say" what you want it to... problem solved.  Working miracles the past 2 decades stateside)
  • “My constituents are writing to me -- this is the one big thing in my mailbag,” Treasury Committee member Mark Garnier, a lawmaker in the ruling Conservative Party based in England’s Midlands, said of inflation. “It’s especially a problem outside London where people rely on their cars to move around.” (again, clearly the Brits do not understand the "substitution" effect that works wonders in U.S. inflation reporting - if cars become too expensive, than a consumer will move to bikes.... or horse carriage, hence no inflation.  Although horses are becoming expensive to feed with all the run up in wheat - hence let's stick to bikes.)
  • Consumer prices rose an annual 3.7 percent last month, driven by fuel and food costs, data showed yesterday. On the month, prices jumped a record 1 percent. (So ex food and energy, inflation was only 1%? Stop the whining, have everyone from the smaller towns move to London for public transport and start fasting - no more inflation.)
  • A decision by King and his colleagues on the bank’s Monetary Policy Committee to change tack and raise the interest rate might make life difficult for Prime Minister David Cameron and his plan to cut the record budget deficit. Higher borrowing costs may put an additional restraint on economic growth just as spending cuts by the governing coalition of Conservatives and Liberal Democrats start to bite.
  • “The recovery has enough problems with the spending cuts and growing unemployment,” said Treasury Committee member George Mudie from the opposition Labour Party. “If the MPC lost its nerve at this moment, I really think that would be the final straw. We would be in danger of going back into recession.” 
  • Andrew Tyrie, chairman of the Treasury committee and a Conservative lawmaker, said the pickup in inflation is a “source of concern” and policy makers’ decisions will be “subject to full scrutiny.” Fellow Tory committee member Michael Fallon said this week that officials should start a series of “gradual” rate increases now to avoid sharper moves later.
  • King told the panel at his last appearance in November that inflation, ....will remain “elevated for another year or so,” though taking “strong action” risked destabilizing the economy. He has also said the bank’s “central view” is that slack in the economy will put ‘downward pressure on inflation.” (the same "slack in the economy" logic employed in the U.S. as if we do not live in a global economy where capital can run from 1 country to another.)
  • Economists at Investec Securities and Ernst & Young LLP’s Item Club say inflation may accelerate to 4 percent after the government increased value-added tax to 20 percent from 17.5 percent on Jan. 4.
  • A report by Aviva Plc published today showed that increasing costs is the biggest fear among 57 percent of U.K. households.
  • “To some extent, they’re between a rock and a hard place and I don’t envy their task,” Thurso said. “If inflation drops back, that’s that. If on the other hand it does not, then I think the MPC will be obliged to come to the conclusion that rises in interest rates are necessary.”

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