Tuesday, March 22, 2011

U.K. Inflation Spikes to 4.4% - Probably a Better Comparable for U.S. Inflation than Government Data

I've spent quite a bit of time the past few months dissecting the variances between U.K. inflation and U.S. inflation figures, as reported in other posts.  While some of the cost pressures are due to the British tax system - namely the VAT (which was hiked recently) - the biggest difference is accounting for the cost of a roof over one's head.  Essentially it is excluded in the U.K. inflation figures while it is the dominant weighting in the U.S.  So as we try to get our arms around what the true inflation situation is in the U.S. - rather than the politically convenient figures that have been massaged tremendously the past few decades [Dec 16, 2010: Shadowstats.com - Consumer Inflation as Measured in 1980 would be 8%+, as Measured in 1990, 4%], watching the U.S. "mini me" is one route I am going.

As I've written in the past, the central banker in the UK must write a letter each time inflation is past target explaining what is going on.  Thus far Mervyn King keeps writing such inflation is 'temporary' - one wonders how many years it can remain temporary before you actually have to remove the temporary label.  The comments section in the British papers online seem very similar to what I read on U.S. stories for inflation - lots of frustration with their central bankers.  The main difference is the Brits actually believe the figures the government is reporting because they actually seem realistic.

With the ECB potentially increasing interet rates late spring to summer (the euro is now at a 4.5 month high v the dollar despite all the issues in Europe), it will be interesting to see when the BOE moves.  Compounding matters in the U.K. is a government that is trying to cut its budget deficit rather than let the hose run loose indefinitely as continues in the U.S., so the potential for a return to recession 3-5 quarters down the road, seems to be increasing.  Whatever the case, the Fed is nowhere near contemplating any such moves - hence we can expect the U.S. dollar to continue to be treated as trash.

Via UK Telegraph:

  • CPI rose to 4.4pc in February, up from 4pc in January. Economist had forecast a rise to 4.2pc. 
  • Retail price inflation (RPI), which is based on a longer-running index and is used as a starting point for many wage negotiations, rose to 5.5pc from 5.1pc, its highest since July 1991. 
  • Mervyn King, the Governor of the Bank of England, has said that the January VAT rise and other inflationary pressures meant that prices would likely outstrip pay again this year, leaving real wages no higher than they were six years ago. Not since the Depression-hit 1920s has a fall of such scale taken place, said the central banker. 

Via Bloomberg:
  • The gain in inflation was led by clothing prices and the costs of housing services such as heating, the statistics office said. Clothes prices jumped an annual 2.8 percent in February, the most since the data began in 1997. 
  • So-called core inflation, which excludes costs of energy, alcohol, food and tobacco, rose an annual 3.4 percent after a 3 percent increase in January. 

When will the BOE move?
  • Investors have pared bets on the timing of the next increase after the earthquake, tsunami and radiation leaks in Japan, the world’s third-largest economy. Forward contracts on the sterling overnight interbank average showed yesterday the first 25 basis-point increase will be in August. That compares with bets on March 9 for a June increase.

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