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MSE News: VAT rise triggers inflation hike

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Former_MSE_Natasha
Former_MSE_Natasha Posts: 672 Forumite
edited 16 February 2010 at 11:37AM in Debate House Prices & the Economy
This is the discussion thread for the following MSE News Story:

"Last month's VAT rise meant inflation leapt to 3.5% in January, its highest level since November 2008 ..."

Read the full story:
VAT rise triggers inflation hike

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These threads have been merged to avoid duplication. Thanks to inspector monkfish for the original post.
«13

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  • inspector_monkfish
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    09:30 16Feb10 UK inflation rises to 3.5 pct in Jan as expected

    LONDON, Feb 16 - British consumer price
    inflation rose in line with expectations to a 14-month high in
    January after a rise in value-added tax, more than a
    percentage point above target, the Office for National
    Statistics said on Tuesday.

    *********************************************************

    CPI KEY FIGURES
    JAN DEC F'CAST
    CPI %YY 3.5 2.9 3.5
    RPI %YY 3.7 2.4 3.8
    RPI-X% YY 4.6 3.8 4.7
    ((FOR PREVIOUS STORIES ON UK CPI, CLICK ON [GBHICY=ECI-M]))


    KEY POINTS
    - ONS said that the rise in VAT to 17.5 pct had the biggest
    impact in increasing CPI yy rate, transport also significant
    - BoE Governor will have to write an explanatory letter to
    the government as inflation has risen more than 1 percentage
    point above the BoE's 2 percent target
    - Smallest month-on-month CPI decline for a January since
    records began in 1996
    - Highest CPI yy rate since November 2008
    - Highest core CPI yy rate since series began in 1996
    - Highest RPI yy rate since October 2008
    - Highest RPIX yy rate since October 2008
    - Highest food and non-alcoholic beverages yy CPI component
    since November 1999
    - Highest transport yy CPI component since series began in
    1996
    - Highest communication yy CPI component since series began
    in 1996
    - Highest recreation and culture yy CPI component since
    series began in 1996
    Please take the time to have a look around my Daughter's website www.daisypalmertrust.co.uk
    (MSE Andrea says ok!)
  • inspector_monkfish
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    09:30 16Feb10 - UK inflation rises to 3.5 pct in January, forces BoE letter

    LONDON, Feb 16 - British consumer price inflation rose even further above its 2 percent target in January as expected, though the Bank of England is likely to say this will be temporary when it is forced to explain itself to the government later on Tuesday.

    The Office for National Statistics said consumer price inflation rose to 3.5 percent last month from 2.9 percent in December, its highest level since November 2008. Analysts had expected the annual rate to rise to 3.5 percent.

    Bank of England Governor Mervyn King will now have to write a letter explaining why the central bank has missed its 2 percent inflation target by more than a percentage point.

    Economists and the central bank expect much of the rise in inflation to be transitory, as it is caused by base effects relating to 2008's sharp oil price falls and temporary value-added tax cut dropping out of the year-on-year comparision.

    Weak growth and high unemployment limit the ability of firms and workers to raise prices and wages.

    On the month, consumer price inflation fell 0.2 percent due to post-Christmas discounting. But this was less than the 0.7 percent drop in January last year because of a rise in VAT to 17.5 percent on Jan. 1.

    The retail price inflation gauge rose to 3.7 percent from 2.4 percent, versus forecasts for a reading of 3.8 percent.

    RPI includes more housing costs than CPI, which matches the European Union Harmonised Index of Consumer Prices (HICP), and is used to index many social security payments and some wages.
    Please take the time to have a look around my Daughter's website www.daisypalmertrust.co.uk
    (MSE Andrea says ok!)
  • DaddyBear
    DaddyBear Posts: 1,208 Forumite
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    Drunk at the wheel. They wont raise interest rates until it's too late.
  • Kohoutek
    Kohoutek Posts: 2,861 Forumite
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    DaddyBear wrote: »
    Drunk at the wheel. They wont raise interest rates until it's too late.

    There's a lot of government debt to inflate away...

    The BoE have 80% of their pensions in index-linked gilts anyway.
  • Really2
    Really2 Posts: 12,397 Forumite
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    edited 16 February 2010 at 11:15AM
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    All come out slightly under forecast (0.1% but not insignificant as it was on all measurements).

    Looks like the spike will not be quiet as big as expected. No need to raise rates as it is forecast to go back down on its own. 2-3rd quarter it will dropping fairly quickly.
  • ILW
    ILW Posts: 18,333 Forumite
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    I am sure I am missing something, but it seems that lately BoE rate seems to bear little or no relation to either savings or borrowing rates (unless you have and old tracker).As far as I remember savings rates were always a littel under and borrowing always over. Is it now a redundant instrument?
  • Really2
    Really2 Posts: 12,397 Forumite
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    ILW wrote: »
    I am sure I am missing something, but it seems that lately BoE rate seems to bear little or no relation to either savings or borrowing rates (unless you have and old tracker).As far as I remember savings rates were always a littel under and borrowing always over. Is it now a redundant instrument?

    BoE base rate is nothing to do with mortgage or savings rates unless they are BOE base linked (As you said tracker).
    All other lending is open to market forces. So it just so happens in a time of low BOE base the disparity has grown.

    Not surprising really you would make nothing if you lent at 0.5% it would hardly cover your costs etc.
    Also not many want to save at 0.5% either so as a guide you will see more parity between 2Y fixed rate savings and mortgages. As that is showing costs of borrowing and lending money for banks a BS's.

    (they borrow your savings and lend them to someone else, a little simplistic but it gives an indication of demand for money)
  • inspector_monkfish
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    10:36 16Feb10 RTRS-TEXT-Bank of England's letter on inflation
    LONDON, Feb 16 - Britain's inflation rate rose to 3.5 percent in January, official data showed on Tuesday, triggering an explanatory letter from Bank of England Governor Mervyn King to finance minister Alistair Darling.

    Below is the text of the letter.

    Dear Chancellor,
    Tomorrow, the Office for National Statistics (ONS) will publish data showing that CPI inflation rose to 3.5% in January. That is more than one percentage point above the target. As a result, I am writing an open letter to you on behalf of the MPC. As requested by the National Statistician, in order to avoid conflict with the release of the official CPI statistic, the Bank of England will publish this open letter at 10:30am tomorrow.

    Our remit specifies that we should explain why inflation has moved away from the target, the period within which we expect inflation to return to the target, the policy action that the Committee is taking to deal with it, and how this approach meets the Government's monetary policy objectives.

    Why has inflation moved away from the target?

    In the medium term, inflation is determined by the balance of money spending and the supply capacity in the economy. Money spending, in turn, is influenced by monetary policy, allowing the MPC to meet the inflation target. But in the short run, other factors, which cannot immediately be offset by monetary policy, can cause measured inflation to move around. Over the past three years inflation has been much more volatile than in the preceding ten years, reflecting an increase in size and frequency of these short-run factors.

    Three such short-run factors have driven the current measured rate of inflation up. First, the restoration of the standard rate of VAT to 17-1/2% is raising prices relative to a year ago. Second, over the past year, oil prices have risen by around 70%. That is pushing up petrol-price inflation significantly, which, in turn, is raising overall CPI inflation. Third, although the exchange rate has been broadly stable over the past year, the effects of the sharp depreciation of sterling in 2007 and 2008 are continuing to feed through to consumer prices.

    Over what period does the MPC expect inflation to return to the target?
    This is the third episode when inflation has moved above the target by more than one percentage point. As was the case on previous occasions, the Committee expects this to be a temporary deviation of inflation from the target, as was made clear in last week's Inflation Report.

    The direct effect of the short-run factors on inflation should be only temporary. Thereafter, inflation will be determined by the growth rate of nominal spending relative to the supply capacity of the economy. Nominal spending fell significantly during much of the previous year, although it bounced back somewhat in the third quarter. That weakness in spending has created a substantial margin of spare capacity within the economy. The Committee expects that will bear down on inflationary pressures over time. The effects are already evident to some degree in the labour market, where pay growth has been weak - the average weekly earnings measure of pay has increased by around 1% over the past year. And intelligence from the Bank's Agents suggests that pay growth in the non-financial sector is likely to remain subdued in the period ahead.

    The MPC's latest projections, published last week in the February Inflation Report, suggest that, although it is likely to remain high over the next few months, inflation is more likely than not to fall back to the target in the second half of this year, as the short-run factors wane and the influence of spare capacity builds. Thereafter, on the assumption that Bank Rate follows a path implied by market interest rates and that the stock of purchased assets, financed by the issuance of central bank reserves, remains at £200 billion throughout the forecast period, the Committee judged that inflation was more likely than not to move below the 2% target for a period. By the end of the three-year forecast horizon, on that same monetary policy assumption, the Committee judged that the risks to the inflation outlook relative to the target were broadly balanced.

    What policy action are we taking?

    Although inflation is temporarily above the target, the latest Inflation Report forecast suggests that the underlying pressures are to the downside. The Committee has taken unprecedented action to offset these downside pressures, ensuring that the medium-term outlook for inflation remains consistent with the 2% target. Bank Rate has been cut to 0.5% and the Committee has embarked on a £200 billion asset purchase programme to inject extra money into the economy, thereby raising asset prices and boosting nominal spending. At its February meeting, the Committee judged that it was appropriate to leave the stance of monetary policy unchanged. It is important to emphasise that the effects of the money-financed asset purchases will persist. That, together with the low level of Bank Rate, will continue to provide a substantial boost to nominal spending for some time to come.

    The Committee is committed to taking whatever actions are necessary to ensure that the outlook is for inflation to remain in line with the 2% target. It will continue to monitor the appropriate scale of the asset purchase programme and further purchases would be made should the outlook warrant them.

    Equally, if at some point in the future, the medium-term outlook for inflation threatened to rise above the 2% target, the Committee would tighten monetary policy.

    How does this approach meet the Government's monetary policy objectives?

    The Monetary Policy Committee remains determined to set monetary policy in order to keep inflation close to the 2% target in the medium term, thereby supporting growth and employment. Price stability, as your remit to us states, is "a precondition for... high and stable levels of growth and employment". By ensuring price stability in the medium term, the MPC will make its most effective contribution to economic performance more generally.

    I am copying this letter to the Chairman of the Treasury Committee, through which we are accountable to Parliament, and will place it on the Bank of England's website for public dissemination.
    Yours Sincerely, Mervyn King
    Please take the time to have a look around my Daughter's website www.daisypalmertrust.co.uk
    (MSE Andrea says ok!)
  • Generali
    Generali Posts: 36,411 Forumite
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    Mr King is right IMO.

    Inflation is defined in economics as a persistant tendancy for prices to rise. This looks to me like a one-off increase in prices caused by devaluation of the currency and tax changes. That isn't inflation so there's no need for the BoE to act as they can't impact it.

    Deflation remains the risk IMO.
  • StevieJ
    StevieJ Posts: 20,174 Forumite
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    Generali wrote: »
    Mr King is right IMO.

    Inflation is defined in economics as a persistant tendancy for prices to rise. This looks to me like a one-off increase in prices caused by devaluation of the currency and tax changes. That isn't inflation so there's no need for the BoE to act as they can't impact it.

    Deflation remains the risk IMO.

    Wage increases are the key, what wage increases you may ask icon9.gif
    'Just think for a moment what a prospect that is. A single market without barriers visible or invisible giving you direct and unhindered access to the purchasing power of over 300 million of the worlds wealthiest and most prosperous people' Margaret Thatcher
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