UK inflation jumps most in one month since 1993 – cue mass hysteria

A 1% jump in UK CPI in December meant that the year on year inflation rate in the UK soared from 3.3% to 3.7% year on year, once again beating consensus expectations of 3.4%.  No doubt we’ll have the newspapers tomorrow full of talk of a return to the 1970s, and no doubt we’ll also have various MPC members continuing to come out over the next few weeks and months explaining that this inflation problem is (still) temporary.

Two charts which I think are interesting. This one shows that the bond market is taking the inflation number seriously, and is now pricing in almost 3 lots of 0.25% rate hikes by the end of this year.  The first rate hike is now fully priced in for June.  

The second chart demonstrates that while the MPC has done a bad job inflation forecasting over the past few years, it still definitely has a point about inflation being temporary. If you measure inflation at constant taxes, then the inflation rate is only 2%, so assuming we don’t see another VAT hike in January 2012, we should see UK inflation fall sharply from the beginning of next year. 

That said, UK inflation at constant taxes has still gone from 1.4% yoy in August to 2.0% yoy now, so I wouldn’t relax entirely, but today’s headline inflation figure is nowhere near as bad as it looks. As Jim mentioned in a recent blog, hiking rates could be GDP suicide, and I’d be surprised if UK interest rates went up as much as the market’s expecting.

Discuss Article

  1. hotairmail says:

    By focussing on whether inflation is “embedded” in the economy through wage inflation, the logic is that the BoE is implicitly targetting the impoverishment of working people.

    Do they realise that is the logic of their actions? Would they want that to be widely known?

    At the end of the day, the only good inflation is wage inflation – as long as it is backed up by improvements in output and productivity.

    Loose monetary policy has led to too much liquidity in the world economy. We are in an era of “volaflation” (volatile inflation) as investors (“speculators”) hitch a ride on one investment class after another before each boom sows the seeds of its subsequent bust.

    Or to quote an Alphaville article from 2008 explaining the last commodity spike – we are in an era of quarts into pint pots. The biggest container is the bond market.

    Posted on: 18/01/11 | 2:10 pm
  2. Justin Pugsley says:

    You have to wonder about UK inflation, if it was just the effect of the weak pound it should be dropping out by now. However, I wonder if it isn’t possibly the pricing power of UK utilities, energy cos and supermarkets for e.g. that keeps it high over here or even exaggerates it more than it should? I have heard the UK referred to as treasure isle. As for inflation generally it is beginning to show in other parts of the world, oil looks like it is heading back to $100+ and I think that with commodity price rises generally we’re in a danger that any concerted global growth will send them soaring even more, suck money out of consumer pockets, ratchet up inflation and then interest rates whereby an economic bust will follow. Prices deflate etc… then the economy picks up and off we go again – back to boom and bust basically. So we could in a sense revisit some aspects of 70s.

    Posted on: 18/01/11 | 2:10 pm
  3. Mark says:

    Could you please tell me where i can buy my energy and food from where it costs a mere 2% more than last year.

    Posted on: 18/01/11 | 2:59 pm

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