I’ll be honest, this post confuses me. Was there a drop in prices, or a drop in inflation? As I’m sure the author will be aware, these are very different things.

Hmm. Three measures of inflation, CPI, RPI and CPIY – that last stripping out the impact of indirect taxation. CPI is the official determining measure, though RPI is more widely used in real world scenarios.

The consumer prices index, the inflation measure watched most closely by the Bank of England’s rate-setting Monetary Policy Committee, surged to an annual rate of 3.5 per cent — up from 2.9 per cent in December.

CPIY rate of inflation, which strips out the effect of indirect taxes, fell from 2.8 per cent in December to 1.9 per cent in January.

Retail prices inflation, which includes the cost of mortgages and which is most commonly used in wage negotiations, rose from 2.4 per cent in December to 3.7 per cent in January.

It may well be, Mervyn King predicts, that this spike in inflation is only temporary, but to pretend it isn’t happening at all looks a bit, well, confused and wrong.

Surely as we mere mortals do not have the option of not paying tax, the figure net of tax is irrelevant.

What matters to me is, am I paying more for the same basket of goods and services than I was last year, and by how much.

In that context, the RPI is what matters in the real world, not arcane discussions on unreal situations.

Re: 3

It depends whether you’re measuring inflation, or estimating quality of life. RPI is obviously the benchmark for the latter, but in this instance we’re concerned with economic inflation (which isn’t unreal, just academic) and CPIY is hence more appropriate.

Although I’m still not sure what Guido’s done wrong. This piece seems to state that the index always falls in January, then turns around and berates Guido for not taking a January drop seriously. It’s something of a mixed message, and to be honest I think Guido knows more about markets than most bloggers on either wing.

http://blogs.wsj.com/iainmartin/2010/02/16/dont-worry-about-that-inflation-we-didnt-anticipate-says-bank-of-england/

Sorry, but i disagree. With all the respect in the world, you seem to be the only person in the country to read the latest figures as “inflation going down”.

While it’s true that we shouldn’t be hysterical about it (so count Guido out) and that the rises are mainly due to VAT rates returning to normal as well as steep increases in oil price, the fact remains, both CPI and RPI are going up (3.5% and 3.7%) and significantly more than the government had predicted.

Most significally, from a leftist perspective: the pirce growth seems to regularly outpace wage increases which, for most ordinary people, sucks.

And there is nothing worse than a government or whoever else, trying to tell them that it’s not true because “the CPI fell by 0.2 per cent between December and January”.

This pageon the National Statistics website explains it.

A few points of clarification. I wrote my original post one-handed on the phone, and so it came out a bit cruder than I expected. Moreover, the seasonal effect passed me by first time, although I think the CPIY figures are genuinely astounding. Today’s FT moreover makes the claim that many retailers have delayed putting up prices with VAT as part of an ongoing price war. This may come out in the next few months’ figures.

However, if they delayed the price rises because of lower demand, this indicates deflation may yet take hold. And this is why stripping out tax – despite its ‘realness’ – is the right thing to do. What we are trying to tease out with inflation figures is the balance of demand and supply in the economy. External factors like VAT rises do not reflect those forces. The very sharp drop of the tax-stripped-out index is a sign of how those forces are playing out. Now, imagine that hous prices take another swoon, and the government lays off 100,000 workers. What then?

I understated Guido’s market knowledge – sure, and I take it back – but still think he expressed a very one-sided view on these figures. Most of the reason they say inflation is above 3% are in the base effect – i.e. they happened a year ago. Given his wide and not-always-numerate readership, I think he would be doing it a favour if he explained these factors to them. But hey, it’s his blog.

I would also point out that the gilt went up about 50 points yesterday on the figures – I think they found them more deflationary than expected. This is an instrument yielding 4%, remember. It has come off a bit today on the UE figures.

Tim J, I think where I argue with you is the way you put ‘the spike IS HAPPENING’. It is mostly about stuff that happened from Jan09 to May 09, where the price index rose 1.8% in four months. It has risen 1.5% in the subsequent 8 months, despite VAT rising by 2.5%. Are you sure you think that is a spike?

Without VAT, it would be up just 0.1% in 8 months. Spike?

Those nasty right wingers at the Office of National Statistics and their political machinations.

7 – As it was reported, RPI inflation (the rate that has the most direct correlation with how changing prices are actually experienced) moved from 2.4 per cent in December to 3.7 per cent in January. That’s despite the traditional January downtick. Maybe spike’s the wrong word – how about continued and sustained increase in inflation for over a year?

from a leftist perspective: the pirce growth seems to regularly outpace wage increases which, for most ordinary people, sucks.

that would indeed suck. It would also result in a regular decrease in the real wage, whereas the data shows the opposite. Sorry it’s a pdf (best I could find) but you can see graph of UK median real wage on p5 (numbered 278) here

Luis, I think we have to suck that up. This pain somehow needs to be divided out, and better the real wage falls than UE goes up.

Tim, you are still talking about effects that mostly concern the early part of 2009 and reflect a large VAT increase. RPIY rose by 2.35% between January and July last year, and by 0.88% between July and January this year.

The mystery of how prices kept rising during the depression-period last year is an interesting one. Jamie Dannhauser at Lombard Street suggests a very interesting idea:

‘put forward by the Bank is that firms have been reluctant to lower their mark-ups despite clear medium-term benefits from doing so. Because of the extremely elevated cost of bank funding, companies are placing a considerable premium on maintaining cash flow and a large buffer of
liquid assets. Since price cuts reduce revenue and cash flow in the hort-term (i.e. before the lower prices attract new customers and a higher sales volume), firms are extremely reluctant todo so for fear that they will face a liquidity shortfall.’

I think this seems plausible: at the beginning of the crunch, the right thing to do was not to risk costly ST finance on a low-price/high sales push. With finance recovering, that might be becoming more plausible. So supply constraints had a bigger effect in the early recession than now, and helped to forestall deflationary effects for a while.

crossed wires Giles … I was merely showing Claude that price growth does not regularly outpace wage increases.

Ahh. Too swift. Apologies.

Giles, never trust anyone talking their book. Around Xmas he said on his blog that he had taken an unspecified short position on gilts. The 10-year benchmark at that time in thin markets had moved up to a yield of 4.09%. He needs inflation as he is out of the money.

The headline rise in inflation through base effects has been widely anticipated and base effects due to kick in later in the year will take it back down. However, you are making the mistake that the VAT cut 12 months ago was fully passed on. The ONS estimate 70% of the VAT cut was passed on in full.

More worrying is the poor record of the MPC in achieving their 2% target. Governor King in his letter to the Chancellor said monetary policy would ” keep inflation close to the 2% target in the medium term” The use of ‘ medium term ‘ is quite informative as he has no authority to operate in the medium term. The remit of the BoE MPC is to achieve the target ‘ at all times ‘ Allowances are made for economic shocks leading to departure from the target. However, a VAT hike and rising fuel prices as the global economy recovers is not an economic ‘ shock ‘. The suspicion is growing that the bank are moving to inflation targeting lite. This will raise borrowing costs for the government if it raises inflation expectations and the expectations become implied in the yield curve.

Many economists including the IMF feel the 2% target is too low and the main central banks should raise their target.

http://www.economist.com/blogs/freeexchange/2010/02/monetary_policy_1

Workers without bargaining power will complain as their real wage as opposed to their nominal wage is cut. However, the alternative is higher and sustained unemployment.

@Giles Wilkes

Whilst I normally enjoy your comments, this time I’m afraid you have got it wrong.

CPI, RPI and CPIY are all calculated and targeted YEAR ON YEAR (YoY) basis. They will also be reported on a MONTH ON MONTH (MoM) basis, but importantly, the MoM basis is NOT used for any kind of inflation targeting, as it compares the (annualized rate) of monthly inflation between one month and the next.

Essentially, all your graph is telling us is that inflation went up less fast in Jan when compared to Dec. It doesn’t tell us anything about this Jan10 v Jan09 without backing out all the inflation numbers for the moths in between…which would give us YoY numbers anyway…which as has been widely reported, are heading up rapidly.

Basically, you seem to be confusing the MoM index, which you have charted, and the YoY index which is what is used as the measure of inflation.

Richard, I agree that the 2%-or-4% inflation debate is intriguing – though maybe should be carried out when the waters are more still

Tyler, I know that the figures that are published are annual changes. And that this is what the BOE targets. But I prefer to go to the raw index figures in order to see whether what has come out just now – i..e the new data – is actually particularly new. THe problem with going off annual figures is that 91% of the information is already there. Hence my link to my earlier post, saying ‘this is going to happen’ – no matter what happened between Dec09 and Jan10, the infaltion figure was going to rise and people scream ‘spike’! I think that point was worth making, and was not about being confused.

I personally think a 6month annualised figure is more appropriate, or even 3 months.

@ Giles

OK I understand where you are coming from, but the point I am making really is that your graph is slightly misleading – it doesn’t show inflation going down – it shows it going up less fast than last month.

YoY data does tend to be better as it makes it easier to compare seasonal variation, plus simply put, you have more data.

Luis Enrique,
I’m sorry, but the most recent data from your link refers to 1999…

I may have been wrong in using the word “regularly” when I wrote back @6 that the “price growth seems to regularly outpace wage increases”, but that’s certainly been the case in recent years – for ordinary people of course.

Take a look at this piece from the Times (2007): “Inflation leads to fall in real wages for first time since 1997” or, especially, this study from August 2009 from FXStreet, showing that since 2007 inflation has outpaced average wage growth (look at Chart B and Chart C as you scroll down).

Sorry. I messed up the first link. Here it is:
http://business.timesonline.co.uk/tol/business/economics/article1293987.ece

Well as Guido was on here a while back boasting that he was once a banker it is not really any surprise that he has no idea how inflation works or anything else for that matter.

The last two words of your headline are entirely otiose.

Guido Fawkes’ is Confused and Wrong on Inflation

He is not the only one.

Can I clarify something? Noone knows what inflation will be. The bank does fan charts for this. I was just saying: these figures don’t mean much, if anything, they are weaker than expected.

Could inflation stay well above 3% for a year? Yep. COuld it drop below 1%? Sure

Surely we can’t go around extolling the virtues of long term trends over short term weather on global warming, then claim a one month drop shows we’re in deflation? Obviously this argument can be used in reverse to show the hypocrisy of that section of politicos on how they use statistics too.

Lee, sure. I just didn’t think it proved the opposite. I was not going to go out and write ablog post saying ‘Deflation here at last’.

Missed this.

Wouldn’t it have been more accurate to say “[Paul Staines] is confused and wrong” and leave it at that?

Leave the fool to slosh around in the fetid swamp of his tawdry, unread little blog-of-smears. He is of no consequence.