Government forecasts rising inflation and rising interest rates

 

      The Budget Red Book not only forecasts a rising growth rate in the second half of the present Parliament, but also forecasts rising inflation and rising interest rates.

           The forecasts for the Retail price Index, the older view of inflation, says that this measure of inflation will hit a low of 2.3% in 2013, will rise to 3.6% in 2015 and to 4.0 the following year. Wages will also be rising , reaching a growth rate of 5.6% in cash terms by 2016.

            Against this background the forecast also assumes rising interest rates. Gilt rates are estimated to rise from a low of 2.3% in 2011-12, to 3.5% by 2014-15 and 3.8% the following year. The CPI stays on target despite these changes.

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45 Comments

  1. sm
    Posted March 26, 2012 at 1:05 pm | Permalink

    Forecasts and statistics…

    Who can borrows at Gilt rates?
    Hedonics and inflation?

    How much is gold(minus the tungsten) worth today and how much 10 years ago?

    • Disaffected
      Posted March 26, 2012 at 6:31 pm | Permalink

      Unfortunately the Red Book does not state which party will be in government and what measures it will have to take to clear the huge deficit the Tories failed to clear or attempt to clear, as claimed at the previous election.

      Off topic: Why is the Kennedy report filed on the shelf after so much cost to the taxpayer and after so much public interest to clear up politics? After all, the three main stream parties promised reform.

  2. Mark
    Posted March 26, 2012 at 1:17 pm | Permalink

    OBR forecasts – don’t you just love them? They are still persisting with the fantasy of a new property bubble starting next year too.

    • Kingbingo
      Posted March 26, 2012 at 5:52 pm | Permalink

      Has the last property bubble finished?

      • javelin
        Posted March 27, 2012 at 12:33 pm | Permalink

        No but it will do.

        In the UK we have always suffered coming out of recession – as interest rates go up – and house prices go down.

        In fact from the view point of the average man (as opposed to one who loses his job) things are always worst comiig out of a recession than going in.

  3. JimF
    Posted March 26, 2012 at 1:21 pm | Permalink

    Boiling frogs, I think it’s called.
    Why not just admit the currency’s being depreciated, give everyone 2 weeks to buy hard assets with their Sterling, and do an instant devaluation against the Dollar? Honest and quick.

    • APL
      Posted March 27, 2012 at 8:45 am | Permalink

      JimF: “give everyone 2 weeks to buy hard assets .. ”

      Can you imagine the boost that would give to the real estate market. This is a policy for the final three weeks before an election.

      Because afterward, no one would care what government was in power.

      JimF: “Dollar”

      Representitive Paul Ryan in discussion with Timothy Geithner US Treasury secretary projects, using the US government CBOs own supporting figures the US Economy will collapse by 2027.

      Fifteen years away.

      An assertion not contradicted by the (word left out) Geithner.

  4. Lindsay McDougall
    Posted March 26, 2012 at 1:33 pm | Permalink

    RPI rising, CPI static. That implies rising house prices. Mmm, interesting. Some forecasters expect house prices to go on falling for another 3 years. I suspect that the government expects the effects of past QE to kick in as soon as confidence returns.

    As someone aged 65, I don’t want special tax treatment, I don’t want goodies such as a winter fuel allowance, concessionary fares, cheap swimming pool tickets and (later) a free television license. I’m even happy with the retirement age rising by one year in each parliament and containing the cost of NHS drugs for the elderly.

    All I want is ZERO inflation and for the state to get out of my life. Is that so difficult?

    To get zero inflation, we need a new Govenor of the Bank of England and a new MPC. Are you up for it, George Osborne, or are you too fond of inflation?

    • Disaffected
      Posted March 27, 2012 at 10:09 am | Permalink

      Yes he is. It is not by chance or coincidence the BoE have followed their policy or failed to meet their inflation target. Perhaps they ought to have the inflation target re calculated like the rest of us to their detriment to achieving their goal.

      Mr Osborne is happy to pillage pensioners through £74 billion of QE and he is a happy to keep interest rates low. All of which affects pension income. He is happy to take more through taxation and his budget. In contrast he is very happy to give 5.2% pay increase to welfare lifers next week. He is happy to pay £45 million a day to support the -Eu which has a drag on our economy an no tangible benefit. He is happy for the CAP to remain and farmers go out of businesses on a daily basis to keep the French and Germans happy. He is happy with the mass immigration and asylum seekers overwhelming our public services.
      You can tell he is happy because he and his party have not made any progress whatsoever on any key policy issue after two years in office. The position on each has got substantially worse. Moreover after deriding Labour on their financial planning he has borrowed more, spent more and taxed more than Labour. The UK debt will be 40% higher when he leaves office than when he arrived.Osborne described QE as the action of a desperate government- what does he call his actions? 15 years on from the last time Tories held office and we are back to the old boy network, self serving interest and spoilt boy greed. spoilt boys always want more no matter how much they have. And they always want to be in charge- for their own interests no one else. Least of the all the country.

    • uanime5
      Posted March 27, 2012 at 4:26 pm | Permalink

      Bad news on treatment from the NHS. According to the BMJ the Clinical Commissioning Groups (CCGs) will be able to refuse to treat the elderly to save money. They can also refuse to provide any treatment on the NHS and demand that people use private treatment instead.

  5. David
    Posted March 26, 2012 at 1:55 pm | Permalink

    John

    These are interesting figures. Can you explain why you think these are the forecast numbers?

    It must be quite unusual for a forecast of nearly +6% in wage inflation several years hence.

    With unemployment so high, what are the pressures leading to that kind of forecast?

    PS I still believe that CPI will be significantly above target in the 2012-2015 time frame – mainly due to the BoE policy.

  6. StevenL
    Posted March 26, 2012 at 1:55 pm | Permalink

    Under the OBR ‘forecasts’ 3 month LIBOR rises to 1.7% in 2014/15, implying at the current yield curve a bank rate of 1.5%. My understanding is that these ‘forecasts’ are simple lifted from the current prices of the short term interest rate futures contracts.

    As long as the government are issuing £100bn+ in new debt every year, I can’t see how that BofE can reverse any significant amount of QE in order to raise short term rates. This would surely involve flooding the market with gilts and risking a government bond crash, which could leave mortgage rates more like 10%.

    I suspect the Coalition will try to reflate the economy via infrastructure stimulus before the next election. However I can only see QE expanding. Maybe this is what it means, that rates only rise by 1% against all that forecast price/wage inflation beacuse the BofE is still bidding for its bonds and holding yields down?

    Against the backdrop of a growing economy, growing wages and growing employment such a policy could only be highly inflationary unless there is no new net bank lending surely? Or perhaps the forecast 18.8% and 15.6% rises in residential property transactions forecast for 2013/14 and 2014/15 mean all the extra bank lending and inflation will just go into higher house prices – which don’t count as inflation in Whitehall?

  7. alan jutson
    Posted March 26, 2012 at 3:01 pm | Permalink

    What a surprise.

    Result of QE perhaps.

    Result of devaluation perhaps.

    Result of restocking perhaps.

    Result of price cutting having now reached the bottom perhaps.

    You have been proven right again John, one wonders how much longer people can ignor you !.

    • Disaffected
      Posted March 27, 2012 at 10:12 am | Permalink

      John is a Conservative, the leaders of his party are not. I am not sure how long it will take for people and back benchers to realise.

  8. Kingbingo
    Posted March 26, 2012 at 3:52 pm | Permalink

    The sooner this insane housing bubble is popped so the market can clear the better. If it is interest rates that do that so be it.

  9. Martin
    Posted March 26, 2012 at 4:01 pm | Permalink

    Do these figures take into account Natural Gas production increasing from fracking?

    http://www.telegraph.co.uk/finance/commodities/9165898/Gas-fracking-will-revolutionise-the-US-economy.html

    Onshore gas production should help cut inflation and refloat Sterling after Mr Brown’s devaluation.

    • Dr Bernqrd JUBY
      Posted March 27, 2012 at 3:33 pm | Permalink

      Fracking is a potentially disastrous policy. Not only does it cause earth tremors and pollution from the chemicals pumped in with the water under high pressure but there is no control over the escape of gases which not only pollute the rivers, streams & water table but also cause sickness and even allow people to ignite the water from their taps. It’s now been banned in France.

  10. lojolondon
    Posted March 26, 2012 at 4:32 pm | Permalink

    John, on a totally unrelated point – note how the BBC and Guardian are responding to ‘cash for dinners at No10’ – and how they completely ignored ‘cash for honours’.

    I am telling you something that Hitler and Goebbels knew, Berlusconi and Blair certainly knew, and Crash Gordon ignored at his peril. If you don’t have friendly media, or at least a non-hostile media, you are destined for the dustbin.

    The BBC pumps up every anti-Tory story, and minimises every Labour story, take the last week as an example.

    When there is a Tory budget, Labour comments before, during and afterwards they have the bulk of the airtime. You have never seen so much Balls, Miliband, Harman and Cooper.

    Two years ago, when there was a Labour budget, it was Darling, Brown and Balls, with a smattering of Osborne and a large dash of Cable.

    Please believe me, if the Conservative government does not tackle the Bias at the BBC, then the BBC will bring you down.

    • Kingbingo
      Posted March 26, 2012 at 5:49 pm | Permalink

      Could not agree more lojolondon. But we all knew what a spineless wretch Cameron is. he could not even win a general election against Brown. And no surprise that was, every policy he bends over backwards to make sure it is OK by the Guardian/BBC to no avail as they rail against him no matter how much he panders.

      I think we all know that Cameron is never going to do anything about the BBC because he is a Ted Heath. He needs to lead the party to defeat before he can be replaced with someone who can actually lead to victory and striking at the mass brainwashing organization that forcibly extracts billions a year from the people of this country under threat of prison.

    • Gordon
      Posted March 26, 2012 at 10:47 pm | Permalink

      Lojo,
      I would be more impressed if the current current Conservative leadership were, in fact, conservatives.
      Solution? Privatise the BBC, and STOP advertising all the ‘non-jobs’ in the Grauniad.
      SORTED!

      • APL
        Posted March 27, 2012 at 8:47 am | Permalink

        Gordon: “Privatise the BBC, and STOP advertising all the ‘non-jobs’ in the Grauniad.”

        Yep. Two birds with one stone.

        This Tory (snigger) government, chooses not to do it.

    • Disaffected
      Posted March 27, 2012 at 10:15 am | Permalink

      Europhile Patten is Chair of the BBC Trust. His position would appear in conflict to the terms of an EU pension. Who nominated and appointed him? Could Jeremy Hunt have a say in the way the BBC is run?

      There is no need of a state propaganda unit and so the BBC should be sent into the big wide commercial world to earn its own living. The public cannot afford it in times of austerity.

    • uanime5
      Posted March 27, 2012 at 4:29 pm | Permalink

      What’s you’re explanation for the Times and Telegraph pumping up every Conservative story and ignoring everything Labour does?

      There’s a reason why the media isn’t friendly to the Government; the Government has made a lot of bad decisions, which is why they receive so little support from the media. It’s not the role of the media to sell Conservative policy, that’s the role of the Conservative party.

  11. lifelogic
    Posted March 26, 2012 at 5:14 pm | Permalink

    So “Wages will also be rising , reaching a growth rate of 5.6% in cash terms by 2016” well I would not count on that unless they get the bloated state sector and Unison under some sort of control and certainly not after tax given the budget.

    • lifelogic
      Posted March 26, 2012 at 5:29 pm | Permalink

      I just head some one on radio 4’s PM – (discussing the cash for influence gate I did not the name an MP I think) saying we were “getting democracy on the cheap”. Well wrong on both counts alas not democracy and certainly not cheap.

      Doubtless he want yet more taxes to fund the parties and I assume make very sure that no new ones can ever break in.

    • Adam5x5
      Posted March 27, 2012 at 2:27 am | Permalink

      More like they’re expecting the state sector to employ everyone currently on the dole and then be awarded large pay increases to generate 6% real term increase.

      Because the private sector will be able to afford that won’t it?

    • Electro-Kevin
      Posted March 27, 2012 at 4:36 am | Permalink

      Doubtless certain jobs and regions will experience that sort of wage growth. I can’t see it happening in most other parts of the country though – not if regional pay bargaining returns.

  12. Denis Cooper
    Posted March 26, 2012 at 6:17 pm | Permalink

    Count your blessings, it could be a lot worse.

    According to this (not always entirely reliable) source, the Greek government resorted to raiding the accounts of hospitals, universities and other public bodies to get €1.4 billion it needed to complete the debt deal:

    http://hat4uk.wordpress.com/2012/03/26/exclusive-greek-government-robbed-public-institutions-to-complete-bond-swap/

    Still, shouldn’t ever happen again now that the eurozone crisis has been solved.

  13. colliemum
    Posted March 26, 2012 at 6:20 pm | Permalink

    Just as I thought: the Granny Tax is indeed turning out to be a raid on pensioners’ income: projected rises in inflation mean that state pensions will be raised by the rate of inflation, the PTA however remains the same. Thus less is left over to apply from that PTA to any other income, e.g. occupational pension. Thus more of that income will be taxed.

    These forecasts must have been known to the people in the treasury who formulated the ‘freeze-in-cash-terms’ of the PTA. Thus all the spin about how fair and balanced it all is – with the little spice of ‘don’t be a greedy granny’ added – looks even more despicable than it did a scant week ago.

  14. zorro
    Posted March 26, 2012 at 7:35 pm | Permalink

    ‘Wages will also be rising , reaching a growth rate of 5.6% in cash terms by 2016’……They are living in fantasy land. Do they really think that there will be that demand for labour? There will be hardly any pay rise in the public sector and little more in the private sector unless of course they are going to let rip with a ‘Barbour boom’ on the back of manufactured house price increases and encourage inflation.

    Does anyone on this blog seriously believe that this government is competent enough to successfully unwind upwards of 500+ billion QE (by 2015, yes plenty more to come for infrastructure purposes of course….) without causing rampant inflation. 5.6% wage growth is no use in a 15/20% inflation economy!

    Their RPI forecasts are fantasy/propaganda and you can easily add on a 2-3% assuming nothing else goes wrong if you look at past forecasting form.

    They could, of course, continue with large scale immigration (highly likely) to try and ‘encourage’ price rises, and that possibility should not be discounted.

    If immigration/settlement was controlled and some restrictions loosened, we could get back to a sensible house pricing strategy. Until this quaint British disease is cured, investment will continue to be directed away from productive capacity.

    zorro

    • APL
      Posted March 27, 2012 at 9:30 am | Permalink

      zorro: “.. this government is competent ..”

      No.

      zorro: ” .. causing rampant inflation. ”

      I still think there is a deflationary depression approaching. Caused in part by the collapse of credit and in part by the collapse of the corrupt ponzi schemes the government and their chums in the banks have built up over the last twenty five years.

      • sm
        Posted March 27, 2012 at 10:26 am | Permalink

        UK Car sales at 94 levels, not adjusted for population.
        Continuing immigration. No signs of price to earnings ratio of houses changing. What is holding up this pack of cards?

        Time to review the definition of fraud and how it should apply to elected and other public officials.

  15. pickled pepper
    Posted March 26, 2012 at 9:05 pm | Permalink

    Of course, inflation is always the result of PRINTING MONEY, euphemistically called quantative easing, they tried it in Germany after the first WW. Inflation went mad and Hitler came to power. Those who wont read history, like our beloved PM, are doomed to repeat the mistakes.

    • uanime5
      Posted March 27, 2012 at 4:32 pm | Permalink

      Actually hyperinflation had long ended before Hitler came to power. Hitler came to power because the 1929 Wall Street Crash destroyed the economy of Germany.

  16. James Sutherland
    Posted March 26, 2012 at 9:29 pm | Permalink

    Why are these figures being filed away, rather than produced as evidence at a disciplinary hearing to terminate the members of the MPC for non-performance of their statutory duty? How and why are we supposed to tolerate them completely ignoring their jobs, indeed actively exacerbating the problem they are employed to control?

    I am sure a fireman who turned up to each house fire with a few jerry-cans of petrol to chuck on would soon be unemployed, not to mention incarcerated; the MPC’s economic sabotage does far more damage, so why is it not remedied?

    • Bazman
      Posted March 28, 2012 at 7:02 pm | Permalink

      Might not have to bring his own jerry cans of petrol if the advice given out today is heeded. Don’t keep couple of whellie bins full in the garage though. It’s not very ‘sensible’. You could be ‘incarcerated’ or something like that..

  17. Caterpillar
    Posted March 26, 2012 at 10:09 pm | Permalink

    There are clear advantages for the Government to engineer an RPI-CPI gap (see uses of indices paragraph 3.86 in OBR March 2012) – it is difficult to see good ethics in this.

    E.g. the ‘apparent quasi-theft’ (is that a safe enough description) of switching public sector pensions from RPI to CPI (have the unions appealed the December ruling?). As I have noted before applying this to future contributions seems reasonable, public sector workers can opt out, join the private sector, hold additional investments, but to do this to contributions already made (including those who have left the public sector or worked in it when salaries were lower) is simply the Govt taking a chunk of accrued benefits (a risk that employees did not know of at the time).

    In general I don’t like index linking with CPI and RPI, I do wonder whether nominal GDP growth could be used so that both price changes and the state of the economy are captured. And that gaps cannot be utilised by governments.

  18. AJAX
    Posted March 26, 2012 at 10:30 pm | Permalink

    Did the same Budget Red Book foresee the systemic collapse coming in 2008?

    • Paul Smith
      Posted March 27, 2012 at 2:45 pm | Permalink

      Thats what narks me about this Government, i got out of housing in 2006 and into Gold – it quadrupled, i knew the meltdown was coming – so did Vince Cable because he stood up in parliament and warned the Gov (Gordon Brown) about a credit bubble and increasing house prices – he was laughed at and waved on by Gordon Brown.
      Plenty of people on http://www.housepricecrash.co.uk were warning about the meltdown in 2008
      I can only assume our leaders let it happen, everyone was complacent, Cameron never stood up in parliament warning about anything, if our MP’s didnt know the 2008 crash was gonna happen – they are not fit for office

  19. Paul Smith
    Posted March 27, 2012 at 9:11 am | Permalink

    All our MP’S ARE (bad news -ed)

    Can you imagine that shower running the country during 1939 and 1945

    There will be no growth, oil is the canary in the coal mine, it peaked in 2006 and by 2020
    the market will be minus 20 million barrels a day – that means complete meltdown

    Growth is over, John Redwood is delusional, stop voting for the same old crappy MP’s
    The tories are a repulsive party, full of millionaires – thing is you cant eat money!

  20. APL
    Posted March 27, 2012 at 9:26 am | Permalink

    JR: “Wages will also be rising , reaching a growth rate of 5.6% in cash terms by 2016.”

    Only the wages of sin will rise, that is those enjoyed by the connected elite. The rest of us, increasing inflation, decreasing margins for businesses ( those exposed to the market ) and thus pressure on employees to be more ‘efficient’, which is to say, take no pay rises.

    • zorro
      Posted March 27, 2012 at 5:42 pm | Permalink

      APL,
      Re above and further above, they will print to avoid any chance of deflationary depression – you can be sure of that, surer than anything.

      zorro

  21. PaulDirac
    Posted March 27, 2012 at 2:09 pm | Permalink

    Regarding the RBS share sale to Abu Dhabi.
    Why is this government is selling those shares at a huge (and crystallized) loss to the UK?
    It means that in order to eventually break even the target price for the rest of RBS would have to increase above our “buy” price of 50 p/share, to say about 80 p/share.
    We held on to those shares through the tough times and now when you can see a possible recovery in the banking sector, we sell them to a foreign country so that they can realize a huge profit in a short time.

    This is a scandal which is much worse than Gordon Brown’s sale of our gold at a fraction of the price it would command now, while Gordon could plead ignorance, Osborne could only plead idiocy.

    Apart from the monetary aspects, John is right, this would limit our ability to split RBS and leave our largest bank in the hands of a foreign power.

  22. Dr Bernqrd JUBY
    Posted March 27, 2012 at 3:39 pm | Permalink

    Pensioners who rely on any investment income are being squeezes by higher prices and falling incomes with the appallingly low interest rates on their hard-earned savings, “Quantitive Easing” – inflation/devaluation by weasel words – erodes the ability even more. So do increases in VAT.
    This huge sector can’t spend anything to get the economy moving again. Wake up Government and do something to help rather than tax us even more!

    • Bazman
      Posted March 28, 2012 at 7:06 pm | Permalink

      It would be very helpful to the economy and pension funds if pensioners could just check out a bit more quickly and leave their estates to the state. Incentives to do this could be quite easily be built into the tax system given the political will to do this.

  • 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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