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iTulip on target in the UK at least:
FT Alphaville:
FT Alphaville:
Inflation gestation
Posted by Tracy Alloway on Sep 15 11:44.
So where’s the deflation which Bank of England governor Mervyn King is so desperate to avoid?
The UK’s rate of inflation is slowing — but it’s certainly not nearing deflation levels. The Consumer Prices Index annual inflation rate was 1.6 per cent in August, down from 1.8 per cent in July, and its lowest since January 2005. Expectations, however, were for a 1.4 per cent year-on-year rate.
Inflation is proving stickier than expected.
Furthermore, if you strip out food and energy, you get 1.8 per cent for core inflation in August — hardly deflationary. Likewise, while the Retail Price Index, which includes housing costs and mortgage interest payments, fell by 1.3 per cent in August. If you remove those mortgage payments, however, you get a rise of 1.4 per cent — up from 1.2 per cent in July. These are much firmer figures then the headline numbers, as RBC Capital Markets’ Richard McGuire notes:
What’s evident from King’s opening statement to the Treasury Committee’s hearing on inflation, however, is that the central bank is still relying on something called `the output gap‘ in estimating inflation/deflation risk — despite having mentioned in July that the monetary policy committee might have overestimated the amount of `slack’, or spare capacity, in the economy already.
From Tuesday’s statement:
Posted by Tracy Alloway on Sep 15 11:44.
So where’s the deflation which Bank of England governor Mervyn King is so desperate to avoid?
The UK’s rate of inflation is slowing — but it’s certainly not nearing deflation levels. The Consumer Prices Index annual inflation rate was 1.6 per cent in August, down from 1.8 per cent in July, and its lowest since January 2005. Expectations, however, were for a 1.4 per cent year-on-year rate.
Inflation is proving stickier than expected.
Furthermore, if you strip out food and energy, you get 1.8 per cent for core inflation in August — hardly deflationary. Likewise, while the Retail Price Index, which includes housing costs and mortgage interest payments, fell by 1.3 per cent in August. If you remove those mortgage payments, however, you get a rise of 1.4 per cent — up from 1.2 per cent in July. These are much firmer figures then the headline numbers, as RBC Capital Markets’ Richard McGuire notes:
Both the core CPI and RPI measures of inflation also came in to the firmer side of expectations - the former holding steady at 1.8% y/y (consensus 1.6%) and the latter edging up modestly from -1.4% to -1.3% y/y in contrast to a forecast pull back to -1.5%. In addition to the fuel-related pressures witnessed in the CPI report, RPI also saw upward pressure from house prices which rose during Aug this yr having fallen 12 mths earlier.
From Tuesday’s statement:
Despite the more positive recent indicators, the falls in output that have occurred over the past year have opened up a significant margin of spare capacity in the economy. That spare capacity is bearing down on inflationary pressure. Over the next six months, inflation is likely to be volatile, initially falling further below the 2% target from its present level of 1.6%, before rising above the target. That volatility reflects base effects as well as the reversal of last year’s VAT cut.
In the medium term, the margin of spare capacity means that the risk is that inflation will be below the 2% target. It was for that reason that, at its August meeting, the MPC chose to inject further monetary stimulus into the economy. In just the same way, it will be the outlook for inflation that will guide when and how quickly the MPC raises Bank Rate back towards more normal levels, and when and by how much the assets purchased since March are sold.
In the medium term, the margin of spare capacity means that the risk is that inflation will be below the 2% target. It was for that reason that, at its August meeting, the MPC chose to inject further monetary stimulus into the economy. In just the same way, it will be the outlook for inflation that will guide when and how quickly the MPC raises Bank Rate back towards more normal levels, and when and by how much the assets purchased since March are sold.