Tuesday, February 17, 2009

Inflation Spin Masks Dire Deflation

Government inflation figures are masking the dire state of the economy as ministers have become victims of their own spin. Today's official figures hide what lies beneath, as the country spirals down into dangerous deflation. 

Even the government's own official and well-spun inflation figure has sunk to 3%, craftily hiding the true fall. Things must be really getting bad for the economy.

Inflation dropped to 3% in January, down from 3.1% in December, as measured by the government's consumer price index (CPI), already seized on some with a gleeful "it's not as bad as expected". But that cut no ice with the Times.

The better indicator, the Retail Price Index (RPI), which includes housing, is already falling into dangerous negative territory. It's at a scary 0.1% last month from December's 0.9%. 

And that will send a cold chill down the spine of those whose pay rises, pensions and savings are directly linked to the realistic RPI. 

The fall raises the spectre of deflation which will become negative this year. But the government continues to bury its head in the sand, preferring its own CPI which  kept them in good stead during the boom years

Deflation is the killer punch for any economy. Any hope of a boost by increasing consumer spending, is either short-lived or just doesn't happen. People shop around frantically looking for the cheapest deals and put off spending, preferring instead to try to clear a mountain of debt. 

The CPI is a neat little device used to set inflation. It works by carefully selecting what government wants to measure and then a cunning weighting is dropped in to make those final tweaks and adjustments.

Inflation used to be measured by the retail price index (RPI) but New Labour ditched that in 2003.

The CPI is a less effective measure of price falls than the old RPI, but it's much easier to manipulate. But even the spin cannot hide the downwards spiral. 

As the government and Bank of England run out of magic bullets for the economy, the next step has to be to print money, lovingly disguised as 'quantitative easing' and a barrow full of banknotes

It's clear the government hasn't a cat in hell's chance of funding its ridiculous borrowing binge but printing money is fraught with long-term dangers.

Brown has steadfastly buried his head in the sand, refusing to shoulder any blame for the current economic disaster. The Orange Party has warned time and again the government is in denial about the dire state of the economy. 

There are realistic ways out of the depression recession, apart from massive government borrowing and reckless spending and printing cash but that would mean the government would have to own up to past mistakes and stop believing in its own spin.

3 comments:

John said...

Weird.

0.1% isn't dangerous negative territory, it's positive. By 0.1%. That's the point.

The RPI isn't "a better indicator" in these circumstances, because by including housing it includes interest rates. That's why it's fallen.

Without the VAT cut and the interest rate cuts, RPI is around 3.5%, or, close to its old target!

the orange party said...

John - Perhaps you should have a word with The Times whose analysis chimes with my own.

John said...

Oh I commented there as well, they're wrong too, as they have been regularly throughout the crisis. They don't describe the RPI as the best measure, though.

To do that, one would have to

1) Explain how, given that you raise interest rates to combat inflation, and cut them to combat deflation, it can make sense to use an inflation measure which goes up when you raise interest rates, and down when you cut them.

2) Explain equally how you can make any kind of policy based on a target which is completely different in its effect on different groups of people. A fall in RPI due to lower interest rates makes debtors richer, by cutting their living costs. But it makes savers poorer, by reducing their income without any concomitant fall in their living costs.

We should expect some deflation this year, because inflation was so grossly above target in 2008, and from VAT cuts. But RPI isn't the way to measure that, and if energy prices fall back, that's no bad thing anyway. Meanwhile, CPI excluding tax cuts was 4.1% for the past year - actually up from 3.9% in November.