US inflation 1.1% UK inflation 4.1%

Metals, oil and food prices have tumbled on world markets. As predicted here, the story of early 2009 will be price falls, disinflation, deflation. The Central banks were so wrong to worry about inflation earlier this year, as they tightened the noose around the necks of easy credit. It’s making it so much more difficult to kick start the economies, as the damage to the banking sector is severe.

So why is US inflation well down, and UK inflation still too high? There are two simple reasons. The first is the pound is very weak whilst the dollar is strong. The UK has lost a lot of the benefit of falling raw materials and energy prices through the devaluation. Chinese imports are now also a lot dearer. The second is the cost of government. In the UK petrol and diesel taxes are so much higher than the US, with a large element that does not go down when the oil price falls. Items like Council tax always seem to go up (unless you live in Hammersmith and Fulham) whatever the economic circumstances. Many public sector fees and charges also exceed inflation on a regular basis, whilst the state monopoly post and the semi nationalised railway industry have recession defying price policies which sting the consumer.

UK inflation will come down next year. Looking at the range of government policies they are aiming to rekindle inflation again once they do manage to turn the economy round. The amount of money being printed, the low level of interest rates, and the reduction of competition in crucial areas like banking all point to a lot more inflation in due course, once they have worked out how to mend the banks enough to avoid a long and deep recession.

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6 Comments

  1. Stuart Fairney
    Posted December 17, 2008 at 7:28 am | Permalink

    You very neatly highlight two reasons why deflationary fears maybe over done. There is perhaps a third. Being saddled with unmanageable debt levels, Mr Brown has three choices:

    ~ raise taxes: he will but only after the election should he win. (economically this makes about as much sense as setting yourself on fire to stay warm)
    ~ cut spending: goes totally against the grain but some of this will be forced
    ~ inflate the currency by radical money supply increase under the cover of staving off deflation. Mr Mugabe followed a similar policy

    So whilst SF doesn’t give financial advice, blah blah, it maybe time to start looking at various asset classes because after trashing the economy and the public finances, Mr Brown seems intent on the destruction of Sterling.

    May I finish with a quote from Ayn Rand

    “Inflation is not caused by the actions of private citizens, but by the government: by an artificial expansion of the money supply required to support deficit spending. No private embezzlers or bank robbers in history have ever plundered people’s savings on a scale comparable to the plunder perpetrated by the fiscal policies of statist governments”

  2. mikestallard
    Posted December 17, 2008 at 5:56 pm | Permalink

    I want to pursue Lola’s post (above.
    OK, so Mr Brown is never going to admit he was wrong and to stop wasting our money on Statist government.
    On the other hand, I wonder what would happen if, by a miracle, he actually took taxes down to, say, 30% instead of nearer 50%?
    On the face of it, this is lunacy.
    However, I wonder if more taxes would be collected because everyone would then pay up and not fiddle their way out. Even the enormous number of half a million public sector jobsworths might go down?? Dubai (Is it just about to crash?) has pretty well zero taxation and works much better than we do in lots of ways.
    In this dream scenario, maybe the public might then revisit the shops, the Unions might stop some of their stranglehold on the government’s pension plans and, who knows, there might even be some more pleasant work in the private sector for the work shy?
    And then I woke up……

  3. Brian Tomkinson
    Posted December 17, 2008 at 7:00 pm | Permalink

    JR: “The amount of money being printed, the low level of interest rates, and the reduction of competition in crucial areas like banking all point to a lot more inflation in due course”

    When is a politician going to stand up against this madness? Are you all determined to ruin us. How can this lunacy resulting in rampant inflation provide any value to the economy, savings, jobs or prosperity?

  4. Matthew Reynolds
    Posted December 17, 2008 at 8:35 pm | Permalink

    I think that a £1,000 cheque for basic rate taxpayers being sent out in April 2009 would get cash to people to rescue household finances from disaster in many cases. The lower a persons income the more likely they are to spend and so a person on say £15,000 p/a could do the high-street a major favor so to speak.

    Raising the public sector retirement age & the private one to 68, ending white elephants like RDA’s , the New Deal while using market forces to slash procurement costs and freezing civil service recruitment in the longer term could balance the books as could replacing JSA & IB with one sort of payment designed to reduce economic inactivity. Telling QUANGO’s to cut their budgets by 25% over three years or face losing all public money could alone save £25 billion. IT schemes & ID cards can be binned to reduce the PSBR.

    My idea means one last £22 billion hike in the budget deficit to ward off deflation and then from 2010-11 onwards public expenditure is frozen in real terms until the budget deficit is wiped out totally. Priority areas could get funding increases financed by other areas getting pared back.

    This would obviate the need for all Labor’s proposed tax increases.

    Top rate tax should be 40% on incomes exceeding £250,001 p/a and 30% on those between £50,001 & £250,000 p/a with a 20% basic rate on taxable incomes between £15,001 & £50,000 and a 10% rate on taxable incomes between £12,001 & £15,000 p/a. The basic personal allowance should be a flat rate £12,000 exemption for all taxpayers regardless of income and age etc

    Most income tax breaks could be ended altogether. This system would reserve top rate tax for the wealthy – but the higher rate would be lower & the threshold higher than under Brown’s plans. Many people getting punished by 40p tax would be pleased at no longer facing it and the middle class burden would fall . Pensioners & the lower paid would gain from keeping more of their own money free from tax and would benefit from the 10p band returning.

    We need lower personal taxes to become competitive once more – but my idea would be fair as everyone would get less of a tax bill but having a sliding scale of rates would stop people facing quite such an extra tax burden the more they earned.

    My tax cuts & deficit reduction could be phased in from 2010-11 onwards and would give the UK economy the kind of Reagan style upswing that the USA so badly needed after the Carter Malaise.

  5. Bazman
    Posted December 17, 2008 at 9:52 pm | Permalink

    I thought inflation was down? Must be on my holidays.

  6. Richard
    Posted December 18, 2008 at 6:36 pm | Permalink

    Extracted from minutes from the last BOE meeting:

    … inflation would be strongly influenced by the impact of the temporary reduction in the standard rate of VAT from 17.5% to 15% for 13 months. The direct effects might reduce CPI inflation by around one percentage point through most of 2009, followed by a corresponding addition to inflation during 2010…

    If near-term deflation is expected to be a problem, I can’t see the sense in the recent implemention of a fiscal policy that has the impact of reducing CPI by 1%.

    Given that it takes 12-18 months for interest rate changes to work through the system, it seems odd to reduce interest rates now when we have a firm expectation of increased inflation. It’s nice to know the MPC can ‘abstract’ out bits of inflation in its decision making. Perhaps they should have done that with the oil price spike?

    As far as I can see fiscal policy is working against monetary policy (either that or it’s the plan to devalue the pound).

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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