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.