±«Óãtv

I'm comfortable with the prominence given to last month's inflation figures. They were a worry and the small drop this month doesn't change that.
But I'm less comfortable with the low key reporting of the L55bn trade deficit. There's been much made of the instability caused by the US trade deficit of L393bn but pro-rata to GDP i guess it's not much bigger than the UK's deficit. Why has so little been said about this and how it is being financed - presumably through borrowing.
Can you shed some light on this?

Although the monthly CPI figure has shown a sudden fall, I think we should take it with a pinch of salt at the moment.
When you look at the long term trend for CPI and RPI, the trend has been upwards since mid 2005 - and we are still in this trend.

It wouldn't surprise me if inflation continues it's upward track until we see more cooling in the economy as a whole.
I don't see that at present.

Why never believe an Evanomics?

In my first ever class of statistics, my professor asked the class what is the similarity between a mini skirt and statistics?

Answer) You can flaunt what is not important and hide what is.

Similarly, With all this noise about inflation what is important to know what is inflation in the first place. Inflation is the rate of rise of prices over a given period.

Now, how come when the price of energy are an all time high and the first price cut is still yet to come did the inflation come down? It is simple, its a comparision from last year but who should explain the Evanomics that the last year the prices rose at an all time high speed.

So this is a high rise over a previously high price. And this is true of all the necessities of life. Food has gone up, Services cost more, utility bills are up, council tax is up, general taxes are up, fuel duty is up, rate of borrowing is up, even cost of basic bread is up by 10% Phew.

And the non essential items, generally imported from China, LCD TV, computers, mp3 players are falling in price.

Now the most important part, which Evanomics fail to consider is the impact analysis.

You may have heard that the UK economy is growing by 3% a year as an argument against the rise of inflation. Simply putting, so what is the prices are rising, we are earning more so we should be able to pay for it. That would be true if there was fair distribution of wealth.

I remember Tony Blair saying he does not care how much David Beckam makes he is more worried about how much a nurse makes? Foolish came out of my mouth. Its David Beckam's of this world who are buying out all the property and making things more difficult for the common man.

The rich are getting richer and squeeze is tightening on the common man. and that is the true face of this inflation.

Evan
I saw you late last week waiting around with your camera crew in Whitehall and was tempted to stop and suggest something to you but my train was imminent.
I have an idea where you / ±«Óãtv could initiate a really informative 'project' for informing the general public on government spending etc.
If you'd like me to expand on this let me know.
maybe I'll stop next time!
Regards
Steve

Evan, very pleased to have found this blog with the help of a link from Nick Robinson. Funny how you say do 'we' over react to monthly economic figures because I am not sure who you mean by that. I suspect many economists weren't really signifcantly worried about inflation being on the door of a very pointless upper govt target. It is however news that can be reported on and economic reporters seem to love speculating- a well known cause of inflation. I always find it highly ironic and amusing that the people reporting on economics often have the power to change the economic situation with their 'educated speculation' on the state of the economy and their predictions. Not to say I don't enjoy your work anyway Evan and keep up the speculation!

Nick

I think the long term outlook is for a great deal of inflation. It will be driven by the world's largest economy, the US. The US has a massive government debt and budget deficit. While the deficit is diminishing, there are enormous overseas holders including China which owns over one trillion dollars in US government obligations. How will the US handle this? I think the way it always has, by running the government printing presses around the clock. Well not literally, but in reality even much more efficiently by electronic means. By inflating its currency, it devalues the worth of that debt paying back expensive money it borrowed with cheap money. China will get a lesson in history and economics. Another factor will be oil shortages which push the price of oil up and everything else along with it. This could come as demand continues to increase by China and India and any disturbance to the supply line which is now barely adequate for worldwide demand. One thing to understand is that oil is fungible. If Venezuela suddenly won't sell to the US but restricts sales to others, the US will buy oil elsewhere on the world market. The only effect on oil prices is if total supply is actually reduced affecting the overall supply/demand balance.

There are many losers but also winners in inflation. Losers include banks, those on fixed pensions, investors in fixed rate bonds and mortgages, anyone in structured securities, that is highly levereged interest based investments. This is how a lot of people and companies got into serious trouble the last few times interest rates shot up during inflation. Suddenly financial geniuses including two American Nobel Prize winners looked like dunces. So did a lot of pension fund managers. Stock markets in general often perform poorly in an inflationary high interest part of the cycle. But winners are those who are invested in real property and those who borrowed long term at a fixed rate when rates were low. These include homeowners with mortgages...if they don't lose their jobs. Generally, the value of their homes will eventually soar while their salaries might not quite keep up with inflation but they usually still come out ahead. Also collectors of fine art objects such as expensive paintings will find their assets appreciating.

I do understand the need for vigilance by the BOE as far as inflation is concerned. But given the fact that they are all supposed to be experts in Economics and have seen inflation rise and fall in the past, I still do not understand why the rise in base rates in January, when clearly even without that rise the inflation figure would have dropped to 2.7% or thereabouts. A January interest rate rise would not have acted that quickly to dampen inflation and to me it seems like the MPC was just being political to save face because they knew there would be a leap to 3% in CPI and however temporary it may have been, they needed to show tough action. They knew that CPI would drop in the following few months, and the fact that the voting was split 5-4 shows how undecisive that rate rise actually was.

Economics are a proven science, it is after all a delicate balance betweeen several economic factors. I am amazed that "we" still use a panel of Old people to decide whether or not to decrease or increase interest rate. Decision should be taken automatically by computer system, calculations and data fed into a central data bank for the Super Computer to decide on the direction of the interest rate.
If really the bank is independant then we should make it a computerised system free of Political, personal intervention

Evan I (almost) always find you very level headed and balanced - thanks! This article was just that.

No panics; no ''one side'', the FACTS put into perspective with researched info; (not ''some people say'' rubbish) and also gave ''us'' more information than generally available (ie;furniture/transport in/out)- Great & Thanks.

My only remaining beef with you, however, is that ludicrus article you wrote last year about why you wanted a property crash - I trust you are better now and that you are over it.

Keep rolling Evan :-)

'Over reacting' to the data or not seems somewhat nihil ad rem; the monthly data provides the size of the fuel aperture for the engine of economies, the data stirs the mix, as it were. Gives momentum.

I think an interesting point in this debate is when is the right time to react? At what point would you say trends have changed, and start to change your perceptions? Surely its correct to look closely at current measures, as there could be important implications for not moving quickly in the short term, but keeping in mind the long term trend and how this affects youre expectation of future movements. For example, if you bought into dot com shares, saw the sudden drop in expectations and prices but on the basis of long term trend thought that this may be an overadjustment then you could have lost a lot of money. I know the economy is a lot more complicated than this, and in other sectors then if you can afford to hold onto shares through a dip in the market then you are likely to make a profit in the long term, but surely minor movements in the economy can have knock on effects in a similar way to market movements. I think people in practice try to use a mix of what has happened in the past and seeeing what everyone else is doing when they make decisions, so the increase in inflation last month and the press coverage would have convinced some people to deter investments in the housing market etc, meaning these indicators affect people in similar way to market movements. Not everyone has the time to analyse the economy in detail, and will use their own yardstick, or feeling as to how the economy is going in making their decisions. The impact on normal peoples expectations is a big part of what would ultimately lead to any long term economic impact. Its human nature to follow the herd!

It might be time to consider the real horror - medium term negative inflation. The Japanese economy nearly collapsed a few years ago as almost all purchases and investments in every sector were deferred in the expectation of a fall in prices. The suppliers to every market reacted to this deficit in demand by doing just what the laws of economics dictated - and cut prices. The purchasers and investors saw this signal and said, "A-ha! We were right!" So they waited again! So suppliers cut their prices again. And so on. It's right to try to control the excesses of inflation but as it goes hand in hand with growth we'll just have to learn to love it. I know I have...

Evan

Great to see more of your work in the form of a blog. I think that it is important to look not only at the overall level of the CPI/RPI indices, but also at what is driving its movement.

Given that a lot of the movement is caused by commodities price movements in the wholesale market, such as gas and oil, the Governer of the Bank of England can do what he likes with interest rates but it will actually have very little impact on this area of inflation. Increasing interest rates will only stop overheating in the sectors of the economy involving discretionary income/expenditure. Managing this is all well and good, and an important function of the MPC. But hiking interest rates when the driver of rising prices of essential goods is still going to be strong is a dangerous game to play. Not only will essential costs such as heating and commuting continue to rise, but people also get hit with higher housing costs so it really risks sacraficing growth and consumption in areas that aren't causing problems.

Stagflation.... the economist's nightmare when certain essential living costs continue to rise despite neutral or negligible growth in the eceonomy at large.

gareth, I have heard your song all of my adult life. "It's impossible to buy a house, there is nothing available that a first time home buyer can afford." There are bubbles and dips in the housing market in the desirable areas to live in in western nations but on the whole, housing prices rise over time with inflation. The trick is to make sacrifices to jump on the train at the earliest possible time. A modest home, either one which isn't too large or an older home which may need some minor repairs is a good choice for a couple starting out in their twenties or thirties, especially before they have children. It could mean foregoing other things you want like having to drive an older smaller car and keeping it longer, not dining out as often, less extravagent vacations, clothing and other discretionary expenses but in the long run, it is far better than paying rent. In the US, the government wants people to own their own homes. It promotes this by allowing income tax deductions for interest on mortgages and real estate taxes, and has created federally supported quasi public corporations which lend money for mortgages. ±«Óãtv ownership has proven over time to be the best single investment most people ever make in their lives. It's worth the sacrifice.

Evan,

The problem is not that we have too much data from ONS, or too many published macro-model forecasts (fewer now than when I was a City economist fifteen years ago), giving rise to too much noisy chatter about what it all means. We have too little good quality economic analysis in the public domain.

You are one of the few journalists able to keep an even perspective of sane moderation in the midst of the 'data blitz' that is the ONS press office. So, if you can hide your blushes for a moment, you're doing a fantastic job. Keep it up!

Housing demand is driven ultimately by demographics, the need to find places to live by the number of people in the population. As this number is invariably expanding, housing will always be in demand. Builders of new homes can and do create bubbles overbuilding and then sometimes going broke holding unsellable surplus stock until population increase takes over the market again. The tricks to making money on housing is to select from among the most desirable homes, buy them in good condition when the market is low, and have the flexibility to hold them until demand is high. I sat on one house for 5 years, I'm sitting on another for 2 years and a third for nearly 7. Looking to sell at the absolute top of the market and buy at the absolute bottom is a bad idea. There's an old saying for investors and speculators on Wall Street; bulls make money, bears make money, pigs make....manure. When the world's largest economy is constantly in debt, you know inflation is inevitable because it is constantly printing money to pay off its debt. When the US economy had a budget surpluses, that's when it suffered its worst depression, in 1929. The US economy is built around deficit financing. Every other economy has no choice but to follow suit as US currency over time bids up dollar prices of raw materials with inflation. Only true improvement in productivity through technology or transfer of production to very cheap near slave wage labor such as in China brings prices down over the long term. Recessions occur periodically but are also bubbles. That's the best time to buy real property if you have the money. That's when interest rates on loans are lowest too. Realtors generally undervalue property in order to encourage sales. They would rather make a sale than see the seller get top dollar. My advice, do your own market research before buying or selling property, don't trust a realtor to tell you exactly what a property is worth. Unlike paper securities there is no such thing as an exact market value for non liquid assets.

Banks view on this...

1, Price inflation/Wage push inflation = BAD......
2,House price inflation = GOOD......

Because 1 = More real earnings in the paypacket.

and 2 = More Debt secured on property.

Britain is being mugged.

Fountain's vrs Road pricing, while i understand the comparision being drawn here. It is important to remind ourselves of the differences, after all people require the use of the roads every day while drinking fountains our not always in use

Inflation is primarily caused by money supply - the amount of paper money that the central banks 'print'

The UK's money supply was over 10% last year. So in fact inflation is really a reduction of the worth to our paper currency.

This causes asset price inflation (i.e house prices) which bubble up until they pop, to be followed by the next particular asset.

The raising of interest rates is only paying lip service to inflation, because the central banks are the ones causing it in the first place!

Isn't the fact that the 'blip' in inflation rate occured in the month on which tne many pension increses are based good news for pensioners?
Also, did Gordon Brown know something when he announced the next increase in State Pension at a rate substantially higher than the (then) inflation rate?

Some kind graphs would be nice, with a timeline of different events. You know what they say about pictures. Oh and they should probably go back 3 years or so to give a little more perspective.

With unleaded petrol now again fast approaching £1 per litre, I guess the greedy oil companies blame the price of crude for the increase.

However, not so long ago their argument for rises in petrol was due to the continuing strength of the US dollar. So where is the drop in prices now that the dollar is on the slide? Or are they conviniently keeping quiet on this issue?

People keep suggesting that inflation is bound to go up because the money supply is suddenly growing fast (like it is a new thing) but I have a feeling it has been growing fast for well over 10 years. Can anyone enlighten me/ correct me?.