Down, but hardly out
The latest CPI release shows inflation is still alive and well: deflation is nowhere in sight (ignore the interest rate distorted RPI).
True, the 12 month inflation rate has fallen from 2.9% to 2.3%, but in the midst of the deepest recession since 1427, that's still over the government's 2% inflation target.
And when you look at the detail beneath the headline, you find food inflation still bounding along at 8.6%, housing and household services (mainly utility bills) running at 6.1%, and every single area except clothing and transport comfortably in positive territory.
And actually, the picture is even worse than that.
Remember the small matter of that temporary VAT reduction? That's had the effect of artificially depressing the headline inflation rate. When you look at CPI inflation excluding VAT and other indirect taxes, you find it's running at 3.8% pa - a full 1.5% pa above the official headline number.
That VAT reduction will be reversing next year. At which point, what was a 1.5% cut in headline inflation will become a 1.5% increase.
It could well be even worse - if the rumours of a new 20% VAT rate are true, we will get a whopping 3 percentage point jump in CPI inflation.
Like we've said many many times, deflation is not the problem.
As we'll all discover post the 2010 election.
PS A couple of weeks ago I heartily recommended lefty Brad DeLong's podcast lecture course on American economic history - for those whose knowledge of the pre-WW2 US economy is sketchy (like me) it seemed ideal. I was immediately contacted by BOM reader Philip W who warned that DeLong gives a highly partisan and distorted view of the Great Depression and the New Deal. And he suggested the following antidote:
Thank you Philip - a very good corrective.
As for Brad's podcasts, once I got onto the post-WW2 period, with which I am fully familiar, I soon discovered I couldn't bear more than about 20 minutes. I'm sorry, Brad mate, but I don't believe all Republican Presidents have been evil idiots, and I don't believe all Democrat Presidents have simply been unlucky. And I certainly don't believe we can afford to be relaxed about high inflation because net-net it's costless and it's just a redistributional thing robbing from the rich to give to the poor. I'm now worried for the Berkeley students taking Economics 113.
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