[OPE] The return of inflation

Bank feels price rise pressure
By Daniel Pimlott and Chris Giles in London

FT January 18 2011

Investors are betting the Bank of England will start raising interest rates
in early summer after soaring fuel and food prices pushed inflation higher
than expected in December. The UK consumer price index rose to 3.7 per cent
in the year to December, with inflation up from 3.3 per cent in November.
The latest nasty surprise on prices led some economists to predict that
inflation will reach 5 per cent, more than double the Bank's 2 per cent
target. (...) The high level of inflation - reflecting the 25 per cent fall
in sterling since 2007 - gives the Bank an even worse dilemma than the
European Central Bank, which put down a marker against price rises last week
after inflation in the eurozone rose to 2.2 per cent. In Britain, the Bank
is coming under fire, partly for failing to foresee the rise in inflation.
As recently as last February [i.e. before the general election in May
bringing
the Conservatives to power] it forecast inflation would be only 1.5 per
cent in the fourth quarter of 2010 and thought the chances of the 3.4 per
cent outcome were negligible. (...) Most of the rise in inflation last month
came from higher petrol prices, long-planned increases in gas bills and
rising food prices [plus rising airfares - JB] rather than by shops putting
up prices before this month's VAT rise [from 17.5% to 20%], the Office for
National Statistics said. The Bank [of England] argues that such price
increases are temporary. It suggests inflation is going to fall next year,
once the rise in VAT falls out of the annual comparison and spare capacity
in manufacturing and services discourages companies from raising prices.
(...) The best market proxies for interest rates suggest investors are now
pricing in at least a 0.25 percentage point rise by July, with rates
expected to exceed 1 per cent before the end of the year.
http://www.ft.com/cms/s/0/5e5b830a-22e6-11e0-ad0b-00144feab49a.html#axzz1BQqV5fnP

The presumption is that companies will not raise prices, because then their
sales will drop - but that may not apply for goods and services which people
absolutely have to buy from just a few outlets (food, household goods,
health, utilities, transport costs and the like). Petrol and food
prices are certainly set to rise in 2011 and 2012; in general, the cost
of living will rise somewhat (and significantly in those countries
affected most by rising food prices).

The ECB provides some nice graphs of the evolution of EU price inflation
here: http://www.ecb.int/stats/prices/hicp/html/inflation.en.html

There is an interesting interview with Claude Trichet here:
http://www.ecb.int/press/key/date/2011/html/sp110115.en.html

Trichet reiterated his often-stated belief there that "Inflation hurts in
particular the poorest", which is probably true if subsidies or benefits
do not compensate for the rising cost of living.

He points out that "the crisis of the euro" pandered by hysterical
commentators is just hot air; those commentators would in fact be
better off taking a holiday in Spain.

J.

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Received on Tue Jan 18 19:21:04 2011